Mr Busoli gave a recent example of a trustee who was considering lending most of their assets to an unrelated company.

“This loan was to be unsecured except to the extent of a personal guarantee. The increased risk was to be reflected in the interest rate,” he explained.

Mr Busoli noted that SIS does not prevent a trustee from entering into such an arrangement provided it has been adequately considered in the fund’s investment strategy.

“In short, SIS does not prevent a trustee from making what is likely to be a lousy investment, if they believe it is a good idea at the time,” he said.

However, the unrelated company then intended to purchase shares in another company to acquire property and a business asset.

“The fund member would become a director of the second company and hold a 40 per cent equity position. This is a clear breach of the sole purpose test,” warned Mr Busoli.

Arrangements such as these, he said, have created the need for SMSF auditors to pay careful attention to investments in related parties or in this case, investments that seem to be unlikely to unrelated parties.

“Concerningly, there seemed to be outside parties with vested interests advising the trustee on this matter. Quite apart from the clear ethical and professional issues involved, such parties need to consider that if the fund breaches SIS and suffers a loss, any party involved in the advice is liable for that loss,” said Mr Busoli.