SMSF trustees and auditors should be checking a current lease arrangement is in place when a fund is dealing with property rented to a related party in order for these arrangements to pass the annual fund audit, according to a specialist auditor.
Seamless SMSF specialist auditor and head of technical and training Frank La Spada said auditors had a responsibility to check the status of a lease as it was a key document defining the leasing relationship between an SMSF and a related party.
“We could lease a property with a handshake arrangement, but a current lease agreement is required from an SMSF audit perspective for the auditor to actually be able to look at the terms of the arrangement,” La Spada said during a webinar conducted by Accurium today.
“If the lease is expired, it’s going to be a problem because how are we able to review the terms and then actually ensure they are in place?
“I don’t think the lease being expired will automatically give rise to a contravention, but it will need to be looked at a little bit closer because there may be certain elements where it could be an active lease even though on paper it might not be written down as evidence.”
Also speaking during the webinar, Accurium head of education Mark Ellem said an expired lease may be an issue where business real property was involved because to include it as an asset of an SMSF it had to be used exclusively as a business and be subject to an enforceable lease arrangement.
“Some lawyers I have spoken with have said those terms can still be current if the parties continue to act in accordance with the lease that had expired, and then it still is enforceable,” Ellem said.
“The takeaway here for practitioners is that as part of preparing the annual accounting before it goes off for audit, make sure that the lease is still current and the rent is being paid in accordance with that lease. So, if the lease says the rents are paid on the first of every month in advance, that actually happens, not paid whenever they’ve got the cash flow.”