Auditing, financial advice, Residential Property

No special action for related-party leases

SMSF residential property related party lease rental agreement

Rental arrangements for SMSF properties involving related parties need not be managed any differently to commercial lease agreements.

A superannuation industry leader has reminded advisers related-party leases regarding a residential property held inside an SMSF need not operate in a substantially different manner to other rental agreements because associated compliance requirements may be more stringent.

Deloitte superannuation, SMSF and retirement savings partner Liz Westover acknowledged this misconception has resulted from auditors wanting rental appraisals for related-party leases on a regular basis.

“Auditors are constantly wanting an independent verification [of rental appraisals for related-party leases] to make sure the fund is operating on an arm’s-length basis. They tend [to ask for it less frequently] when you’ve got arm’s-length or unrelated-party transactions depending on the nature of them, but as soon as there is a related-party lease in place, they want the rental appraisals actually done,” Westover told attendees of The Tax Institute National Superannuation Conference in Melbourne recently.

“But where I see some people going wrong is thinking that they have to get those annual rental appraisals done [and subsequently] update the rent every year and that is not necessarily the case.

“If you have a lease arrangement in place, so you’ve got a commercial lease afoot … and you have a rental appraisal at the [commencement of it] and your [rental] increases are [carried out] as per the terms of that lease, you’re not expected to do a rental assessment every year.”

Conversely, she pointed out if trustees were performing a rental assessment every year, that practice would actually be used as evidence the lease of the SMSF property was not occurring on an arm’s-length basis.

She suggested trustees and their advisers ignore the surrounding noise currently associated with this issue.

“There is this pressure on at the moment, we’re seeing a lot of commentary about valuations and appraisals and so forth [having to be] done, [but] just make sure it is being done in an appropriate way,” she said.

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