Jason Hurst, technical superannuation adviser, for Accurium said trustees should also ensure they obtain evidence of that rental appraisal for auditing purposes.
“There’s a little bit of confusion around when you need a rental appraisal but you should have one when you’re entering into a lease. For example, XYZ SMSF is leasing a property to a related entity. They’ve entered into a lease in March 2024, for five years, and they received a rental appraisal just before that,” Hurst said.
“That appraisal said the market for that property was $1,000 a week, indexed to CPI. So, they did all the right things. They signed a five-year lease, and based that on a $1,000 per week index. Two years later, based on the agreement, rent is now $1,060 per week. However, due to shifts in the market, the properties in the same area that are similar, are going for $1,500 a week.”
Hurst continued that can often raise concerns for trustees but that it is important to remember that although it’s an arm’s length tenant, they have, in good faith, entered into an arm’s-length five-year rental agreement for $1,000 a week.
“You don’t need to change that. We couldn’t go to an unrelated tenant and all the properties have gone up so we’ll raise the rent three years before the end of the lease. That obviously wouldn’t happen,” he said.
“The same logic would apply with a related party tenant. We would review that and at the end of the five years, if the properties are going at $1,500 a week, you would certainly need an upgrade then. But not mid lease. You wouldn’t need another rent appraisal, in this case, until at least 2029.”
Hurst said transactions need to be on arm’s length terms due to both a SIS Act requirement and a tax requirement.
“Section 109 of SIS says if the arrangement is not on arm’s length and it puts the SMSF in a worse position than what an arm’s length transaction would, then that would be a SIS section 109 breach,” he said.
“If perhaps it puts the SMSF in a better position, perhaps they get more income than they should from an arm’s length arrangement, or they incur less expenditure, then that would be a tax issue, which is the section 295-550 NALI issue, which can be particularly punishing with the 45 per cent tax rate. They’re the two areas that we do need to consider.”
Hurst concluded that navigating these issues can be a “balancing act” and it can “tip either way”.
“[It’s important to remember] that if it’s advantageous to the SMSF, that’s a NALI issue, if it’s not advantageous, then it’s a SIS issue,” he said.
