The superannuation industry act of 1993 states that unless the parties are dealing on arm’s length terms, a trustee must not invest. A trustee can borrow from a member of the SMSF on a term of no arm length or more favorable to any other parties.
Low or no interest loan
The awareness of the zero interest loans is necessary for any superannuation savers with self managed funds. The zero interest loans are made by the SMSF trustee under a limited recourse borrowing arrangement.
If a trustee of a SMSF enters into a low or no interest loan with a related party, for the purchase of an asset, it would not breach the arm’s length provision.
ATO will view a loan as an arm’s length breach, only if the loan terms favor the lender. According to ATO, there is no breach of law if the terms are more favorable to the SMSF. This is explained in the ATO publication, ATOID 2010/162. The trustees of SMSF should deal like a bank on commercial basis.
This provision should not be considered as a loophole by any chance. If a SMSF is planning to lend money to the member, he should get a confirmation from the ATO about the zero loan arrangement to buy any asset, under the limited recourse borrowing arrangement.