Sharron Kyroussis, partner, business services for BDO Australia, said while an SMSF may be an appropriate entity to hold investments across asset classes, including real estate where it is leased to a related party, it is essential that terms are commercial and appropriate documentation is used.
“For example, this includes a standard lease agreement on arm’s length terms. More importantly, trustees should document and retain records of the basis of the terms, including any correspondence or reports from professional third parties,” Kyroussis said.
She said keeping well-documented records is even more crucial if the fund wants to avoid any non-arm’s length income issues, and accurate valuations are essential to avoid ATO scrutiny.
“Trustees need to report any NALI income in their SMSF’s annual return each year. Specifically, you’ll need to disclose any assets or loans involving related parties.”
“These disclosures may prompt the ATO to take a closer look and ensure dealings are at arm’s length.”
Kyroussis continued that during a potential review, the ATO may obtain its own independent real estate and/or rental income valuation.
“If the ATO believes the trustee’s valuation is inaccurate, they may challenge it, so it’s important to ensure all information is up to date and accurate.”
“For example, we’re aware of a case where the ATO believed the rental income reported by a fund was too high. They supported their position with their valuation of what they considered arm’s length rental income.”
However, Kyroussis said that upon closer review, it was discovered that the ATO’s valuation was based on an incorrect floor plan, and that the lettable area was less than the actual floor area shown on the final plans.
“Once the ATO valuation was recalculated using the correct floor area, it closely aligned with the trustee’s original valuation. In this instance, both parties agreed that the trustee’s valuation provided was the most appropriate under the circumstances.”
This example, she continued, highlights that it is best practice to always obtain a proper valuation, especially when dealing with related party transactions and to double-check the details to ensure the valuer has used the correct and final information.
“Trustees should also maintain clear records of all valuations and supporting documents, as these may be critical in the event of an ATO review,” Kyroussis said.
