Newsletter No. 10, October 2012

Providing Financial Assistance to a Relative

According to SMSF statistics published by the Taxation Office, most SMSF members are aged 50-plus, which means, most will have children who are now in their 20s and over.

I was recently asked by friends whether they could purchase a property in Melbourne for their son using the money built up in their SMSF.   My friends’ SMSF had approximately $900,000 accumulated superannuation savings.  Their son is planning to move over to Melbourne to commence a new job and will need accommodation in Melbourne.  They were hoping that as long as they charged their son rent at commercial rates, it would be OK to do this.

I was so glad they spoke to me first, before doing this.

I explained to them that the only way their SMSF could purchase a property in Melbourne and lease the property to their son would be if the value of the Melbourne Property is no more than 5% of the total value of assets in their SMSF.  As their accumulated superannuation savings is about $900,000, the Melbourne property would need to be no more than $45,000.

You see, my friends thought it was the total annual rental value that needed to be no more than 5% of the total assets value of their SMSF.  I explained to them that it is the dollar value of the property and not the rental value that needs to be no more than 5%.

My friends than asked if they could just lend money to their son from their SMSF so that he could establish a good life in Melbourne.  Of course they would charge a commercial rate of interest on the loan.

I explained to my friends that unfortunately they cannot do that either.  The superannuation law does not allow it.  My friends asked what if the money loaned to their son is no more than 5%.  I told my friends that the law does not allow them to lend any amount to their son at all.

I left my friends with a copy of my book and bookmarked Chapter 15 on in-house assets, which explains about the residential property needing to be no more than 5%. I also bookmarked Chapter 13 which explains how a SMSF cannot lend or provide financial assistance to members or relatives.  I felt good that my friends are now well informed but also felt their disappointment in not being able to help their son with their hard earned savings from their SMSF.

You see, the sole purpose of superannuation is to provide for your retirement.  The money in the SMSF needs to be preserved and maintained in a safe and secure environment so that it will have time to grow and be there for your retirement.  If the superannuation law allowed people to access their savings during the accumulation phrase, the money may be subjected to abuse and may not have time to grow.

For example, if the superannuation law allowed my friends to loan money to their son, do you think their son will pay commercial rate of interest on the loan and repay the loan back to his parents when the time comes for the parents to retire?  He might, but then he also might not. Also, what if something unfortunate happens to their son like he loses his job and is unable to repay the loan.  Do you think the parents will hire a lawyer to recover the debt plus any interest unpaid on the loan? This is why the law can seem a bit harsh in not allowing loans to family members. But in some ways, at least having the law there prevents us from having to make the choice between our retirement savings and our need to help our family.

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund in plain English”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.