Can You Lend Money To Your SMSF Interest-Free?

By John Mcilroy | More Articles by John Mcilroy

SMSFs can borrow money to invest provided the arrangement meets the rules for SMSF borrowing arrangements. One of the key rules is that the loan must be made on a limited recourse basis.

The question has arisen as to whether the loan to the SMSF could be interest free, and if so, does this cause the ATO to potentially treat the forgone interest as a contribution to the fund (which could lead to excess contribution problems).

The ATO has now publicly released comments discussing these questions and although the comments are qualified, they are still very favourable. The ATO suggests that provided there is a borrowing in place (which means there must be a loan agreement and it is intended by all parties that the loan will be repaid), the absence of interest on the loan would not preclude the arrangement from being a borrowing.

The ATO also doesn’t see that there is a contribution issue for the fund to consider simply because there is a low interest rate on the loan to the fund. You need to consider all aspects of the borrowing arrangement in question.

Like many super strategy issues, anyone contemplating building up their super through an ‘interest free’ loan should check out all the rules carefully as it is not black and white. Making a completely interest free loan to your own fund is perhaps not the smartest idea around. Proceed with care.

John Mcilroy

About John Mcilroy

John McIlroy's career has spanned the financial services, accounting and tax fields for over 28 years. He has written four books on superannuation including the best-selling 'Superannuation Explained Simply'.

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