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ATO, Property

Regulator bulletin may be misleading

ATO property development

An ATO instrument regarding lease arrangements pertaining to property development held by SMSFs is potentially misleading, a lawyer has said.

An ATO regulator bulletin covering property development is potentially misleading in relation to lease arrangements regarding business real property, a specialist lawyer has said.

During his presentation at last week’s Tax institute 2020 National Superannuation Online Conference, Sladen Legal business law principal Phil Broderick noted there was an inconsistency with the information illustrated in an example included in SMSF Regulator’s Bulletin (SMSFRB) 2020/1 with regard to Superannuation Industry Supervision (SIS) Regulations 13.22C and 13.22D and commercial leases.

The ATO bulletin example examines a situation where an SMSF invests in a SIS Regulation 13.22C unit trust that undertakes a property development involving both residential and commercial properties. In the example, the residential properties are sold and the commercial property is contained in the unit trust and leased to a related party.

These leases, however, expire after five years without an overholding clause and the narrative in SMSFRB 2020/1 suggests a breach of SIS Regulation 13.22D exists because the lease arrangements that were in place have ceased to be legally binding.

According to Broderick, the conclusion the regulator reaches is questionable legally.

“From a legal perspective, one, leases don’t have to be in writing. So the fact [is] that the original lease expired, and potentially we’ve got a new lease that’s not in writing. There’s no obligation in [SIS] Reg 13.22C or D that it be in writing; it’s just that it be legally binding,” he noted.

“Secondly, the SIS Act doesn’t necessarily require there to be a lease. You can have a lease arrangement, and the concept of lease arrangement as defined in the SIS Act and [SIS] Regs is a lot wider than what is a formal lease.

“So even though the original lease might have expired, one, there might be an oral lease that has been entered into by the parties, or secondly, there’s probably a tenancy at will, which itself is a lease arrangement.

“And thirdly, most leases have an overholding clause anyway so I just think that example is wrong.”

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