A sector technical expert has cautioned against having a tenant of a commercial property held by an SMSF, who is also a related party, pay for fit-outs or other improvements relating to that asset as it presents a significant risk of breaching the Superannuation Industry (Supervision) (SIS) Act.
Accurium head of SMSF education Mark Ellem pointed out practitioners and trustees facing these situations must determine whether it is normal commercial practice for tenants to pay for upgrades to the property, as well as the type of improvements involved.
“If they are improvements that are fixed to the property, [in other words] they can’t be removed, then there is the general law that says anything that is fixed to the land is owned by the owner of the land,” Ellem told attendees at the Accurium SMSF Compliance Day 2024 held in Sydney this week.
“So the owner of the land is the SMSF and if [there has been an improvement made and it was paid for by the related-party tenant], then the fund has acquired an asset from a related party not being an accepted one, meaning it will be a breach of section 66 [of the SIS Act].”
However, he did recognise an SMSF ruling that presented a scenario where the practice would not represent a compliance breach.
“If you have a make-good clause regarding the tenant-funded improvement, so it compels the tenant to remove the improvement when they leave, and if they don’t make good when they leave so the SMSF automatically acquires [the asset, then] that’s okay. So there is that option,” he said.
“You need to look at [the situation]. It is possible depending on the documentation for the improvement, but also whether or not that improvement is something that can be easily removed.”
