A sector specialist has alerted advisers to the need to continually renew lease arrangements for business real property acquired through an SMSF or a non-geared unit trust involving a related party to avoid any compliance issues.
“A lease of business real property [to a related party] is okay directly from an SMSF and also from a non-geared unit trust. If you look at the exception to the in-house asset rule it says [this is okay] provided it is subject to a legally enforceable lease,” Accurium head of education Mark Ellem told attendees of the latest TechHub webinar.
He pointed out at a bare minimum for the arrangement to meet SMSF trustees’ compliance obligations the original lease for the business property in question must have a continuation clause included in it.
“If there is no continuation clause in the original lease that says ‘if we don’t renew the lease and you continue to stay there and pay the lease then all of the lease terms continue’, then we don’t have a legally enforceable lease,” he noted.
“[In turn it means] we’re not complying with [Superannuation Industry (Supervision) Act] section [covering] the in-house asset rule in relation to business real property, [then if a non-geared unit trust is involved] that non-geared unit trust is no longer exempt from the in-house asset rules.”
Ellem warned the consequences of not having a continuation clause in the original lease or formulating a new lease upon the expiry of that agreement are very severe.
“[If the non-geared unit trust loses its exemption from the in-house asset rules] it’s tainted forever [and means] you’ve got to wind up the trust,” he explained
“That also applies if an SMSF is leasing business real property to a related party. Again it’s permitted provided it is subject to a legally enforceable lease.”
He stressed the issue of having a legally enforceable lease in place is one that is extremely common among SMSFs.