SMSF members holding business real property within their fund should be sure it is being used properly and any rent is paid at market value to avoid non-arm’s-length income (NALI) and sole purpose test breaches, according to a technical specialist.
MLC Tech Connect senior technical services manager Julie Steed said defining the use of business real property was something that had to made clear for audit purposes, but pointed out inappropriate use of a property asset was now on the ATO’s radar.
“There are issues from a valuation point of view in regards to the use of business real property,” Steed stated at the ASF Audits Technical Seminar 2025 in Melbourne late last week, noting the use of some property was easier to identify.
“If it’s a purpose-built facility, look at things like medical practices and surgeries or factories, they are really good for establishing the main purpose [of the property].
“They can be challenging [to value] and we can consider the capitalisation of net income, but that won’t be sufficient evidence on its own.”
She highlighted rent was a factor that could be used to establish a value, but it was critical to be charging market value to avoid a NALI breach.
“We definitely need evidence that a rental arrangement is at market value if it’s a related party and that all of those terms are actually complied with,” she added.
“The number of times we see things like rents due monthly in advance but paid annually in arrears is not good enough and practitioners and trustees need to watch for those.
“My biggest concern for anything with a related party that isn’t absolutely 100 per cent squeaky clean is NALI and potential for a failure of the sole purpose test as well.
“I do think that as the ATO ramps up its NALI compliance activities, it will also start questioning adherence with the sole purpose test.
“If you’re not meeting the sole purpose test, that is, your assets are appreciating for your retirement savings, then you’ve potentially got breaches.
“NALI is going to be the biggest thing for the next five years and we’re going to start seeing instances of the ATO coming down heavily on it.”
