Compliance, Documentation, NALI/NALE, Property

Evidence key to navigating NALI

SMSF property development NALI documents

SMSF auditors and their clients must furnish essential documents to demonstrate compliance with non-arm's-length income and expenditure rules in property development projects.

SMSF auditors and their clients must provide comprehensive documentation and adhere strictly to the guidelines of the documentation when entering into a property development arrangement to avoid running afoul of the non-arm’s-length income/expenditure (NALI/E) rules, according to an SMSF legal expert.

“The key is evidence. The fund has to be able to prove what an arm’s-length transaction looks like and then run the transaction like that,” Cooper Grace Ward partner Scott Hay-Bartlem told attendees at the SMSF Association 2023 Audit Day held last week.

“I’ve seen situations where the SMSF has the evidence and then done something different. No, you’ve got to comply with the evidence and once the transaction is up and running, we have to comply [with the details of the evidence provided].”

With the ATO intensifying its focus on property development schemes, Hay-Bartlem highlighted crucial documents auditors should seek from their clients to reduce NALI/E compliance risks for SMSFs involved in property development agreements.

“Having a written lease, registered on normal arm’s-length rental is good, but then we need to have the tenant pay the rent and comply with the lease terms. If we’re borrowing, we need an offer from an unconnected lender,” he said.

“We are going to need to get a current valuation. Revenue offices normally accept a valuation for three months, so signing a contract today on a six-month valuation probably won’t cut it.

“We need to get more contemporaneous evidence to make sure our rental [price] is correct or the market price we are paying for business real property is correct.

“We have to have the usual kind of contract terms that we have with an unrelated party, and I’ve seen people trying to do very creative things in buying assets from related parties that you wouldn’t do if it’s an unrelated party. We need to provide evidence to show that the terms are the same as they would be for an unrelated party.”

He further emphasised the significance of seeking expert guidance, citing a recent decision by the Administrative Appeals Tribunal, when attempting to establish a specific arrangement was in line with standard business practices.

“An expert report can be good [because it demonstrates] this is what the expert says would normally happen. And when we are doing mezzanine lending with SMSFs to property developers, we are making sure that we can say: ‘We know that these are the kinds of terms we would find in the same kinds of situations,’” he said.

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