If you are looking to make last-minute contributions to an SMSF prior to 30 June, however the banks are closed or EFT and Bpay payments won’t clear in time, a promissory note may be a viable option. A great way to think of a promissory note is that it’s a ‘DIY cheque’ for people with a cheque book – but there are limitations.
What is a promissory note?
A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.
In many ways a promissory note is similar to a cheque. It’s not considered cash, however it’s an instrument which can be exchanged for cash shortly after transfer from one party to another.
Making contributions using a promissory note
It’s possible to make superannuation contributions via both a cheque and promissory note.
For the contribution to be validly received by an SMSF there a few simple, but incredibly important conditions that must be met. Tax Ruling 2010/1 covers the use of promissory notes for contributions received by a superannuation fund.
The following table summarises the ways in which funds are typically transferred and when the contribution is made:
| No. | If the funds are transferred by … | A contribution is made when … |
| 1 | Making a cash payment (either in Australian or foreign currency) to the superannuation provider | The cash is received by the superannuation provider. |
| 2 | An electronic transfer of funds to the superannuation provider | The funds are credited to the superannuation provider’s account. |
| 3 | Giving the superannuation provider a money order or bank cheque on which payment is made | The money order or bank cheque is received by the superannuation provider, unless the order or cheque is dishonoured.[2] |
| 4 | Giving the superannuation provider a personal cheque (other than one that is post-dated[3]) that is presented and honoured with cash or its electronic equivalent | The personal cheque is received by the superannuation provider, so long as the cheque is promptly presented and is honoured. |
| 5 | Giving the superannuation provider a personal cheque that is post-dated and that is presented and honoured with cash or its electronic equivalent | The cheque is able to be presented for the payment (that is, the date on the cheque), so long as the cheque is promptly presented and is honoured. |
| 6 | A related party (as maker) issuing a promissory note, payable on demand at face value, to the superannuation provider and the note is paid with cash or its electronic equivalent | The promissory note is received, so long as payment is demanded promptly and the note is honoured. |
| 7 | A related party (as maker) issuing a promissory note, payable on a future date at face value, to the superannuation provider and the note is paid with cash or its electronic equivalent | Payment is able to be demanded or required to be made, so long as the demand (if required) is promptly made and the note is honoured. |
Prompt payment
What needs to happen for the note to be valid
- Acceptance of a note is acceptable under the rules of the SMSF (trust deed); and
- The promissory note is documented and executed correctly (dated) at 30 June or before; and
- The trustee is in receipt of the note and has documentary evidence of the receipt; and
- The contributor has the fund available to honour the promissory note at the time of issuing the note to the trustee of the SMSF; and
- The wording of the note is of such that it enables the holder / recipient to immediately demand payment; and
- The trustee of the SMSF promptly demands payment from the member of the fund; and
- The member of the fund makes payment (honours the note) within a few business days
Conversely, if there are delays such as the contributor not having the funds to make payment or the payment to the SMSF delayed by any more than a ‘few’ business days, the contribution will be invalid for the intended financial year.
Promissory note template
A sample promissory note can be downloaded here: Promissory Note Template