Related parties that loan to SMSF trustees need to ensure that the loan is a real loan and not a 'financial accommodation'.
Townsend Business and Corporate Lawyers said SMSF trustees should not ignore the rules on SMSF borrowing from related parties by considering loans as paper transactions.
Peter Townsend, the firm's principal, said the loan not only has to adhere to the SIS Act, but also has to avoid appearing as a 'financial accommodation'.
"It has to be a properly documented loan and actual funds have to be paid over by the lender," he said.
Townsend said the money had to be transferred out of the loaner's account and presented at settlement on behalf of the trustee before being received by the Vendor for the amount being paid on the property.
"Journal entries or set-offs do not meet the requirements of a loan or borrowing," he said.
The consequences on the limited recourse borrowing arrangement if the related party loan is found to be a financial accommodation rather than a loan (borrowing) is that the holding trust may fall outside the exception provided by s71(8) which excludes the holding trust from being considered an in house asset. The whole transaction could be non-compliant, Townsend said.
