Product of the month - don't gamble with loans - loan agreements and security go hand in hand

30/08/2017

All loans, including those from related parties, friends and families, should always be supported by a formal loan agreement and relevant security.

Loan and security documents are important not only to secure repayment of money lent but, in particular for SMSFs, having a formal loan agreement and registered mortgage is one of the requirements of the ATO’s practical compliance guidelines 2016/5, which provides trustees certainty that their related party loan arrangement is at arm’s-length.

The cost of having loan documentation prepared outweighs any non-arm’s-length income tax bill from the ATO for SMSFs.

If a loan from family members is not properly documented, this can lead to disputes as to whether or not the money was a loan or gift at the outset and can also leave the lender in a vulnerable position.  

We can prepare a number of different loan and security documents, including:

•    related party loan agreements including a mortgage for SMSFs entering into limited recourse borrowing arrangements

•    commercial loan agreements and associated security documentation (such as personal guarantees, security agreements).

Even if there is an extremely remote chance of the borrower defaulting on the loan, no-one can predict the future, so always back your money with formal loan documents with security such as a registered mortgage or an unregistered mortgage and a caveat.

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