There are common features that characterise when the arrangement of a business property owned by an SMSF and leased to a related party has breached superannuation rules and they should be flagged in the annual audit review, an SMSF auditor and trainer has pointed out.
Arc Super director Ashley Course said red flags can often be spotted around these arrangements as they do not have the same level of detail or adherence to agreed-upon terms as agreements with non-related parties.
“When you look at a related-party transaction, how does that arrangement look? Does it look as though it would if there was a non-related party in the property or if there was a real estate agent managing the property?” Course asked in a webinar hosted by The Auditors Institute today.
“If the answer is ‘no, it doesn’t’, there is a good chance we might start to be bordering into non-related-party territory.”
He said many of the problems were often identifiable in the documents presented by an SMSF at the time of audit, particularly the lease and rental payments.
“What are some of the issues that I come across? We see no leases or inadequate lease agreements [in related-party arrangements],” he said, noting it was a requirement for auditors to check for this document.
“Another issue I often encounter is rent below market rate and that requires us to ask the question of do we actually know what market rate rent is?
“What evidence do you have to confirm what market rate rent is?
“When I get a qualified valuer report, I take out all the rental returns. I gather all this data and would suggest that 80 to 90 per cent of business real property is leased at between 4 to 5 per cent [of the property value] in the areas that I audit around Melbourne and Sydney.
“If it’s anything other than 4 to 5 per cent I then ask: ‘Please show me how you came up with this.’”
He added that related-party tenants also often fail to pay rent on a regular basis and often this figure has not varied in some years.
“A non-related-party tenant will be paying fortnightly or monthly or weekly, like clockwork. More often than not when you’ve got a related-party tenant, the payments come either annually in arrears, annually in advance or in dribs and drabs, and never quite resemble the same payment arrangements that exist with a non-related party.
“Sometimes you see the rent has not changed. I challenge any accountant to show me a trustee client who has business real property leased to an unrelated party where the rent stays the same for years. To me, that does not look and smell like it would if it was an unrelated party.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason