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Has a contravention of section 109 of the Superannuation Industry (Supervision) Act 1993 ( SISA) occurred where there is no written contract in relation to a loan made by the self managed superannuation fund (SMSF)?

Yes. A contravention of section 109 of SISA has occurred, as a contract was not made in respect of a loan on terms which would be expected if the parties were acting at arms length. The terms of the loan favour the employer sponsor.

The relevant financial statements of the SMSF showed an amount outstanding on an unsecured loan between the trustee of the fund and the employer sponsor of the fund. The accounts show no interest as being paid to the fund in respect of the loan made to the employer sponsor.

There was no reduction of the outstanding loan amount from one financial year to the next.

The loan was claimed to be made to the employer-sponsor at an interest rate of 7%, repayable on demand.

No written loan contract was executed by the parties to the unsecured loan.

Under section 109 of SISA investments of a superannuation entity are to be made and maintained on an arm's length basis.

For a trustee and a standard employer sponsor to be dealing with one another on an arms length basis, prudence and custom would suggest the terms of the loan be recorded in writing including when and on what basis interest will be charged and when repayments are due under the loan.

The trustee of the SMSF has lent money without the agreement being recorded in writing and no interest payments or repayments of principal have occurred. This suggests that the parties are not dealing with one another on an arms length basis. Therefore, under section 109 of SISA, this investment was not made nor was it being maintained on an arm's length basis.