03/03/2015

Three directors of an SMSF Trustee have been fined and ordered to pay court costs after they lent money from the SMSF to two different related companies.

The Federal Court has issued fines to directors of Early Sunshine Pty Ltd - a corporate Trustee of an SMSF - after its directors lent money from the Fund to two different related companies.

George Macdonald & Sons Pty Ltd (GMS) was a trucking business which operated on the NSW Central Coast.  GMS was struggling following difficulties in recovering money from its debtors as well as the loss of its biggest customer, Rosemount Estate. The directors lent money to GMS in order to bolster its working capital and help get the struggling business back on its feet.

GMS had previously been the corporate trustee of the SMSF and the directors of Early Sunshine were also the directors and employees of GMS. A small loan made to another company was also controlled by a director of Early Sunshine. The loans occurred over a period of four years, totalling over $550,000.

Although the loans were usually only outstanding for a few weeks at a time and were fully repaid, meaning the Fund suffered no loss of capital, the loans to GMS were unsecured and non-interest bearing, meaning they were not conducted on arms-length terms in compliance with the SIS Act.

These loan arrangements were described by the Court as deliberate and repetitive as they occurred over a number years. In particular, lending to GMS, which was in financial distress, at the time meant that the assets of the SMSF were put at risk given the uncertainty as to whether GMS would be able to repay the loans.

Each director of Early Sunshine was fined $13,000 and ordered to pay court costs for their conduct, which was held to breach the sole purpose test, in-house asset rules, and the requirement of dealing with other entity’s on arms-length terms.

This case serves as a timely reminder that even where the SMSF is not adversely affected, Trustees can still be penalised if their conduct breaches the SIS Act. It is important to always consider the Trustee obligations and compliance with the SIS Act when undertaking any action as a Trustee.

Trustees must maintain the SMSF for the sole purpose of providing retirement benefits to members of the Fund, not to provide financial accommodation to others, including businesses with which they also have a financial interest.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.