SMSF’s – beware of being a lender of last resort

In order to bolster income in a low-interest environment, some Trustees of SMSFs are jeopardising their retirement savings by becoming “lenders of the last resort” by granting high interest loans to unrelated businesses.

Chris Malkin was quoted in the November issue of finance magazine, Smart Company warning trustees off providing these types of commercial loans unless they fully understand the extra risks and legal complications involved, citing the recent case of Pozzebon (Trustee) v Australian Gaming and Entertainment Ltd (in liquidation).

In this case, the SMSF granted a $250,000 loan to the Company (accumulating to $348,000 with accrued interest) thinking it was secured over the Company’s corporate assets. However, the Federal Court ruled the SMSF was an unsecured creditor after finding the Fund had not registered the “security interest” on the relatively new Personal Property Securities Register within the required time.

Malkin says the Trustees must act as though they were a mainstream commercial bank, employ the same level of expertise of loan assessment and seek the same level of security as the bank would in granting high-yield loans, with the Fund’s Investment Strategy, including risk assessment, being well documented. Most importantly, the securitisation of the loan must be the subject of sound legal and financial advice. Failure to do this jeopardises hard-earned savings.