SMSFs have been warned ceasing the lease of an asset to a related party does not automatically help the fund avoid an in-house asset (IHA) breach and the ATO can investigate suspicious circumstances, according to Accurium.
In a technical article, Accurium noted an SMSF holding an IHA was not on its own a breach of the Superannuation Industry (Supervision) (SIS) Act compliance rules, but funds did need to consider the rules relating to the year-end 30 June IHA 5 per cent market value ratio test and the 5 per cent test for acquiring a new IHA in sections 82 and 83 of the act, respectively.
The actuarial firm stated this issue had been raised in a scenario where an SMSF that owned residential property had leased it to an unrelated party for many years, but it was then leased to a child of the members of the SMSF for a couple of months in the 2020 income year and the lease ended prior to 30 June 2020.
According to the firm, the ending of the lease meant there was no longer any lease arrangement between the fund and a related party and therefore no IHA, but the fund had still breached sections 83(3) and 84 of the SIS Act by acquiring an IHA and its value would be used for the purpose of the 5 per cent IHA test.
Additionally, the ceasing of the lease did not deal with the disposal of the excess IHA, but the year-end IHA 5 per cent market value ratio test would not apply.
“The ATO considers that the cessation of a lease of an asset to a related party of the fund does not result in the in-house asset (the residential property) being ‘disposed of’ for the purposes of section 82 of the Superannuation Industry (Supervision) Act 1993,”Accurium said.
“The residential property remains an asset of the fund after the cessation of that lease.”
Pointing to minutes from a National Tax Liaison Group meeting in June 2021, it said the ATO considered ending the lease to a related party would not satisfy section 82 and potentially reduce the market value ratio of the SMSFs IHA to under the 5 per cent limit.
It noted similar events with only a one-off breach were unlikely to result in an SMSF being declared non-compliant and ATO Practice Statement Law Administration 2009/8 outlined the circumstances where the tax commissioner would exercise discretion while issuing a determination that the asset is not an IHA.
“This does not mean that the ATO would not impose penalties, for example, under section 166 [of the] SIS Act, the SMSF admin penalty regime or impose other sanctions, for example, requiring the SMSF trustee(s) to enter into an enforceable undertaking,” it said.
The article noted that where a lease had ceased prior to 30 June, the SIS Act stated the IHA market value ratio test would not apply, meaning no excess IHA has to be disposed of and there would be no issues having to possibly sell the property in order to comply.
“Of course, the ATO may take further action if the lease of the residential property for short periods of time continues in subsequent income years and it can be seen to deliberately cease prior to each 30 June so as not to trigger the year-end IHA market value test in section 82,” it said.
