Compliance, NALI/NALE, Property, SMSF

Commercial lease negates NALI


A shift in the market value of a property leased from a SMSF is unlikely to trigger the NALI provisions if the lease is established on commercial terms.

Having a commercial lease in place for a rental property owned by an SMSF will avoid triggering the non-arm’s-length income (NALI) provisions regardless of the movement in the market value of the asset, a technical executive has said.

Speaking at Accurium’s SMSF Compliance Day 2023 in Melbourne yesterday, Accurium head of education Mark Ellem considered this situation by delving into a hypothetical scenario involving a three-year lease to a related-party tenant for some business real property established on commercial terms.

“In the first year, I’ve gone and got my assessment of market value of what the rent should be and my lease says its $120,000 a year indexed to the CPI (consumer price index) for the next three years. So year one says $120,000 [and the tenant] pays $120,000,” Ellem said.

“We come to year two and [the lease] is indexed to the CPI and it goes up by the relevant CPI amount. But then you go [to] get a valuation, because that’s part of substantiating market value at the end of the year, and in [the valuation] the valuer reports the rent should be $150,000 a year. Do we have a NALI problem? Do we have a SIS (Superannuation Industry (Supervision)) problem?”

To this end, he pointed out the SMSF trustee should not encounter a compliance issue in these circumstances.

“There shouldn’t be an issue because it’s a contract and it was set on arm’s-length terms. And if you had an arm’s-length tenant that signed a lease agreement and it’s come up to a second year and the market’s gone up and the rent’s gone up, you can’t just turn around and say, ‘I’m charging you extra rent’,” he noted.

“I’ve seen that a few times where they go, the market rent has gone up, we should pay the [greater] amount. No you’ve got a lease that when it was signed that was all on commercial terms.

“So we’ve got to make sure that our business real property is rented on [arm’s-length] terms.”

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