SMSFs not receiving rental income from related-party tenants cannot apply a grace period and must insist the terms of the lease are met or risk putting the fund in danger of creating a collateral purpose and breaching the sole purpose test, an SMSF specialist adviser has noted.
Cooper Partners Financial Services director Jemma Sanderson said the sole purpose test only allowed for the core purposes of providing superannuation benefits for the retirement of members or death benefits if they died before retirement, and the ancillary purposes of benefits when a member ceased employment, was disabled or died after retirement or age 65.
Speaking during a presentation hosted by The Auditor’s Institute today, Sanderson added this definition of the test in section 62 of the Superannuation Industry (Supervision) (SIS) Act would exclude any assistance, such as a loan or rental relief, given to a related party even where circumstances were difficult.
“So in terms of this collateral purpose, does this include a related-party tenant not paying the SMSF rent due to funds being frozen due to marriage breakdown?” she said.
“When that sort of thing happens, you need to view it through the lens of what if the tenant was not related. What would the landlord, being the SMSF, do in that particular instance?
“If that was the case where it was an unrelated party, and this is probably going to sound overly harsh, you might say to the tenant you are not unsympathetic to their situation, but can only give some leeway of a few months on the outstanding repayments, which are also accruing interest, and it’s our expectation you’re getting those assets unfrozen through the Family Court in order to pay that rent.
“As trustee you need to be able to see all of those things happening because you have got to wear different hats and look at this almost independently of anything else going on.”
Pointing to recent case history before the ATO and the court, she said any other action was unlikely to be well received as breaches of the sole purpose test were usually indicators of other issues, including breaches of the in-house asset provisions.
“If you’ve ever had a client involved in an audit and the ATO has found loads of compliance breaches, then almost the second there’s a compliance breach, then the sole purpose test is also part of that particular suite of breaches that comes through,” she noted.
“So, with collateral purposes it’s definitely an area the ATO is looking at more closely, and in the outcomes of some recent cases the court has been unsympathetic to these things, as well as noting they were clearly a collateral purpose that was under consideration and often mostly done for tax benefits.”
