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Promissory Note for SMSF Contributions

Table of Contents

 

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.

Payment of a personal cheque or related party note will be taken to have been demanded promptly if payment is demanded within a few business days.

Prompt payment

Where it is clear to the Commissioner that payment has not been promptly sought on a personal cheque or related party promissory note the contribution will, in the absence of extenuating circumstances, be taken to be made if, and when, a payment of cash (or its electronic equivalent) actually occurs.
In addition, its essential that the issuer of the promissory note actually has the funds available as at the date of issue for the promissory note or cheque to be validly received as a contribution as at 30 June if that’s when the contribution has been made.

What needs to happen for the note to be valid

The following key items all need to occur for an SMSF to validly receive a contribution via a cheque or note on or before 30 June:
  1. Acceptance of a note is acceptable under the rules of the SMSF (trust deed); and
  2. The promissory note is documented and executed correctly (dated) at 30 June or before; and
  3. The trustee is in receipt of the note and has documentary evidence of the receipt; and
  4. 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
  5. The wording of the note is of such that it enables the holder / recipient to immediately demand payment; and
  6. The trustee of the SMSF promptly demands payment from the member of the fund; and
  7. 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

 

 

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