SMSF has loaned $300,000 on 14 Jul 2016, $200,000 on 27 Nov 2017, $100,000 on 29 June 2018 and $200,000 on 28 Mar 2019 to the same single non-related party. I was provided a fully executed Loan Deed with Terms as follows: Repayment of all the principal amounts above by 30 June 2020, interest of 15% paid at the end of the loan term, secured by title. The money is being used to develop a subdivision on the land which is securing this loan, and developing land adjacent to this land (which is also be owned by the borrower).
Potential problem 1: Loan Repayment date of 30.06.2020 has been exceeded per the supplied loan deed (agreement), and the loan deed also states the loans made in 2016 and 2017 have been replaced by the current loan deed (agreement). When loan repayment terms are not being met on one or more occasions, does this potentially pose a recoverability issue and perhaps contravention of market value?
Potential problem 2: No regular repayments of principal and interest - the fund has not recieved any principal and interest from the date the money was loaned out - im told this was to be repaid to the fund at the completion of the development and, as the development has not been completed at 30 June 2020 principal and interest has not been received - in essence they are waiting for the development to complete before they get their money - Does this become an arms length issue in itself?
Potential problem 3: Interest rate appears high @ 15% on a secured real property
Potential problem 4: Interest is not being capitalised & a principal and interest calculation schedule has not been provided.
Can you be specific in your response to all potential problems in this case if possible. In your view, do you see arms length (s109) or any other issues (r8.02B) here OR is it a case that because the borrower is not a related party and the terms have been stated in the loan deed (Agreement) then this is an acceptable commercial arrangement (meets s109)?