Loans to Related Parties

There are numerous investment restrictions placed on super fund trustees. These include very stringent restrictions on any investment that involves a fund member, a relative of a member or any related company or trust. In this context, a related party covers the usual structures – partnerships, trusts and companies. The restriction in this area relates to investments in or loans to one of those structures, where the structure can be said to be controlled by a member, a relative of a member or a group of related persons.

Control of a company usually relates to shareholdings and control of a unit trust usually relates to unit numbers. Whoever controls more than 50% of the shares in a company or more than 50% of the units in a unit trust, is said to control that company or trust.

Unlike loans to members or relatives, loans to related structures are not completely prohibited. They are restricted to less than 5% of fund assets. Any loan must be within that limit and the interest rate must be commercial. For example, an unsecured loan of $10000 would normally attract an interest rate equivalent to a bank personal loan or a credit card advance.

Section 69 of the Superannuation Industry (Supervision) Act is the governing legislation.

If a fund does breach this provision, the auditor will be required to qualify the audit report. In addition, the auditor may be required to advise the ATO in writing about the breach.

Provided the loan is either fully repaid or at least reduced to below the 5% threshold and a fully-commercial rate of interest is paid, the ATO will not take action against the trustees, provided the trustees have taken steps to ensure no similar breaches take place in future.

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