The ATO has expressed its concerns over basic details that are missing in audit files with regard to the holding of business real property inside an SMSF where a related party is involved.
“One of the big things we find in audit files to see if the auditor has been meeting their obligations [with regard to business real property] is just the lack of lease agreements. The amount of times we’ve looked at auditor files and they haven’t got lease agreements [is noticeable],” ATO director Kellie Grant told delegates at the Tax Institute National Superannuation Conference in Sydney today.
“For these business real property arrangements, how are we going to be satisfied the auditor has formed a conclusion that they’re on arm’s-length terms?” Grant asked.
“So it’s really important to ensure that you have that lease agreement on file.”
During the same session, BDO superannuation partner Shirley Schaefer noted the lack of information with which her firm has been provided with regard to business real property arrangements where a related party is involved is creating potential issues with detecting in-house asset compliance.
“[For the property] not to be an in-house asset, that business real property must be subject to a legally enforceable lease agreement. It does, of course, have to be on [commercial] terms in order to meet the [conditions] of the SIS (Superannuation Industry (Supervision)) Act,” Schaefer explained.
“And that’s not just about the amount of rent that’s paid, although that’s important, but [also] the terms and conditions of the lease agreement.”
As a rule of thumb, she suggested trustees can determine if a lease has been put in place on commercial terms by establishing whether it is an agreement they would execute with someone they do not know.
“If the answer is no, then it can’t be a commercial arrangement,” she said.
Further, she recognised another common area of business real property compliance weakness.
“Another thing we find gets forgotten a lot is [the execution of] CPI (consumer price index) increases. If the rent agreement says it’s going to $10,000 [a month] and it’s going to increase by CPI every year for the next five years, then we’ll do a market reassessment when it might be renewed, follow the terms and conditions of the lease,” she advised.
