Hello Peter
Thanks for the question.
Single asset investment strategy
The role of the fund auditor is not to examine the soundness of an investment strategy, but rather confirming its existence and whether it has been adhered to.
In the situation at hand, the fund trustee has apparently considered it appropriate for the fund members to have such a strategy.
Section 109 concerns
Whilst you, me and Ray might all think at first glance the interest rate being charged is seemingly low, this does not of itself constitute some kind of proof that the investment is not on an arm’s length basis.
From that facts as presented in the question I note that:
- The director of the borrowing company has provided a personal guarantee
- Four other entities, apparently also unrelated parties, have lent on the same basis
- The member of the fund has an apparent familiarity with the industry/business that the borrowing company is engaged in
- The loan is apparently going to be converted into shares in the 2025 income year
I agree with you, Peter, that any observations about the interest rate can be confined to the Management Letter. That said, I would be very interested to hear the views of other auditors.
Best regards
The Auditors Institute