Related party valuations could be next COVID challenge for SMSFs
With property values reaching record highs, the rental valuations outlook is much more bleak, presenting concerning challenges coming up for SMSFs in the coming year.
Speaking to SMSF Adviser, ASF Audits head of education, Shelley Banton, said that with the commercial properties’ national vacancy rate hitting 11.75 per cent due to entire offices working from home, SMSFs may start to increasingly see the impacts from a bleak rental market.
“Many landlords are currently offering lease agreements with several incentives to lure tenants back into the market,” she said.
“The problem for related-party tenants is that the specific incentive terms are not always publicly available as negotiations occur behind closed doors.
“While there may be anecdotal evidence to support the rapidly changing nature of commercial lease agreements, SMSF auditors may not consider this to be sufficient appropriate audit evidence at audit.”
One of the key problems an SMSF will face is the uncertain asset values in rent from related parties, with Ms Banton noting that it will be important to monitor the ATO’s current viewpoint, where SMSF trustees are required to provide objective and supportable evidence to demonstrate compliance with R8.02B.
“Remember, too, that it is the trustee’s responsibility to provide documents supporting market valuations; it is not the auditor’s role to value fund assets,” Ms Banton said.
“Most importantly, it is the methodology behind the valuation that enables SMSF auditors to form an opinion that the asset was valued at market value.
“The ATO has said that where the absence of evidence is due to COVID, the contravention will not result in penalties.”
Where the fund or a related entity has related party transactions, Ms Banton said SMSF auditors will need to be on full alert.
“Close scrutiny will see the auditor asking questions such as whether the rent is being paid at market value and are the lease terms conducted on an arm’s length basis,” she said.
Ms Banton said with the commercial rental market in freefall, SMSF auditors will have difficulty understanding whether lease agreements containing incentives reflect arm’s length arrangements.
“One recent example saw an SMSF trustee purchasing a commercial property for lease to a related party. They obtained a rental valuation, with the report noting substantial amounts of tenancy subsidies and free rental periods provided in the market due to business hardship and a lacklustre economy,” she said.
“The impact of COVID will trickle through the SMSF industry well beyond the 2021 and 2022 financial years. We can only speculate on how the market will fare as the Federal Government starts to withdraw their COVID support measures, such as the early release of super and JobKeeper.”