Hello Stephen
Thanks for an interesting question.
Given the description you provided in the facts, at the very least, in relation to the payment of $280,000 which went directly from the SMSF’s bank account to pay out a loan personally owed by a fund member to a bank/financial institution, I share your concerns about an early release (it is understood that no condition of release has been satisfied).
Whilst appreciating the argument put forward by the accountant (regarding a loan from the UT to the members of the SMSF) I would be hesitant to accept that argument as the fund auditor. The direct payment from the SMSF to the lender to the fund member casts strong doubt on this “argument”.
Even if we were to accept the accountant’s argument, for the sake of the discussion, there would certainly be a breach of Regulation 13.22C, given a related party unit trust is not allowed to lend to an entity other than an ADI – a breach of Regulation 13.22C(2)(f)(ii).
Where such a breach has occurred, the units in the unit trust are now in-house assets, there would need to be a plan entered into, to dispose of a sufficient amount of the assets (so as to come in under 5% of the fund’s total assets) within 12 months after the end of the income year in which the breach occurred.
I would be happy to hear the the thoughts of other fund auditors in relation to this matter.
Best regards
The Auditors Institute