SMSF trustees will need to hold more detailed information regarding a related-party lease to prove they are being held at arm’s length under the finalised non-arm’s-length expenditure (NALE) rules, an SMSF legal expert has warned.
Cooper Grace Ward partner Clinton Jackson said his firm was seeing lease and loan documents that lacked sufficient details to prove the arrangements were at arm’s length, and they may fall foul of ATO compliance checks.
“We often see when talking with clients about moving a property into an SMSF or when looking for evidence as to whether a related-party lease is on arm’s-length terms that all we get given is a rent review,” Jackson said during a webinar on NALE last week.
“These are usually a letter from a renting agent stating the rent per week and the lease terms, but with no reviews, no options and no requirement to maintain the property or anything else where a lease may require those things to be done.
“A rent review, however, is not enough to substantiate if the terms of a lease are arm’s length and SMSF trustees, when seeking evidence regarding lease terms, should ask the agent to specify what is an arm’s-length term for items such as rent reviews, outgoing costs and maintenance obligations that may apply, and the use of the property.”
He noted some renting agents may not want, nor be able, to provide those details, but trustees could have them confirm appropriate terms in a draft lease.
“The other option is to get a draft lease prepared by a lawyer on terms that are reasonable for the property and provide that draft lease to the agent, and ask that based on those terms what would be the appropriate rent and options, such as rent reviews and renewals,” he said.
“This way you can get some specifics to what you are proposing to do with a related-party lease, but we don’t see that very often.
“If the ATO start to put clients under pressure for other reasons, these are the type of situations that will be hard to justify if they apply the blowtorch.”
