Problem areas flagged with SMSF business property
A technical expert has outlined some of critical compliance steps for ensuring that a commercial lease arrangement involving an SMSF is on arm’s length terms and conditions.
Heffron SMSF Solutions head of SMSF technical and education services Lyn Formica said where property is leased to related parties, it is vital that SMSF professionals and their clients ensure that the lease arrangement between the fund and the related party is on arm’s length terms and conditions.
In an online blog, Ms Formica explained that before the arrangement is commenced, the SMSF trustee should obtain a third-party written opinion of the market rental to be charged on the property.
The trustee would also need to enter into a written lease agreement with the related party on normal commercial terms.
“For example, the agreement should specify the term of the lease agreement require[s] the payment of rent as per the third-party opinion obtained, specify how often rent should be paid, which will usually be monthly, and what action will be taken if rent is not paid on time,” she explained.
It should also specify whether the lessor or lessee will be responsible for the payment of rates, insurance, she said.
“The third-party opinion obtained will usually specify who should be responsible for these costs,” Ms Formica said.
The agreement should also specify when the rental amount should be increased, she added.
It is also important, she stressed, to ensure that all transactions are in accordance with the lease agreement.
“For example, if the lease requires rent to be paid on a monthly basis, the fund trustee should ensure the fund receives the rent on a monthly basis, and if the lease requires costs such as rates and insurance to be met by the lessee, the fund should not ultimately bear these costs,” she explained.
“If the lease requires the rent to be increased with CPI on each anniversary of the lease, the rent should be appropriately increased.”
It is also vital to ensure that any insurance policies over the property are registered in the name of the fund, she said, or where it’s in the name of the lessee, the fund should be noted as an interested party on the policy.
“If appropriate, renew the lease agreement on its expiry based on an up-to-date third-party opinion of the market rental to be paid.”
Ms Formica also pointed out that SMSFs are generally not permitted to lease real property to related parties unless the property is used wholly and exclusively in a business.
“Wholly and exclusively means there generally can’t be any personal use of the property, although there are some exceptions for property used in a primary production business,” she said.
“You need to ensure the property continues to be used wholly and exclusively in a business throughout the duration of the fund’s lease arrangement with the related party.”
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
