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Promissory notes

A promissory note is a written legal document in which one person (the issuer) promises to pay an agreed sum of money to another person (the payee). The payment can occur on a specific date or when the payee demands payment. Promissory notes are generally used when parties want to record in writing that one party owes money to another party. They are less complicated than a formal loan agreement.

Promissory notes will be legally binding, provided a few basic requirements have been met. The document will need to be in writing, clearly set out the obligations of the issuer and payee, and be signed by the issuer in the form of a ‘deed’. This is slightly different to signing a document in the form of an ‘agreement’, so you may want to obtain legal advice to make sure the issuer has properly executed the document. The parties also need to intend the promissory note to be legally binding (i.e. intend to make or demand payment when due).

The issuer and payee have the choice of inserting any terms and conditions into the promissory note that they want. However, if the document becomes too complicated, it may become subject to Australian corporations laws. In these situations, you would need the advice of a lawyer to ensure the document is compliant.

Using superannuation as security for a loan

Under Australian law, it is generally not possible to use superannuation as a form of security for a loan. However, there are limited circumstances where superannuation held in a Self-Managed Super Fund (SMSF) can be used to invest in property – called a ‘limited recourse borrowing arrangement’. The laws regulating this type of borrowing are very strict and only permit the purchase of a single asset to be held in a separate trust. If the borrower defaults, the lender can only claim against the single asset held in the separate trust. The borrower does not have recourse to the other assets of the SMSF.

Suggested way forward

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