SMSFs with lease agreements with a related party can lock in the terms of rent and the frequency of payment and not cause a breach, but should only do so if those conditions would also be available to an unrelated third party, Arc Super director Ashley Course has stated.
The SMSF auditor said lease agreements where rent is set on market terms and subject to fixed percentage increases over time are possible, but any terms should be reset when the lease expires if the market conditions have caused them to increase dramatically.
“This is a common problem that gets discussed amongst some accounting firms,” Course said during a presentation yesterday hosted by The Auditors Institute.
“I enter into a lease agreement with my SMSF for three years with options to renew and there’s an inflation paragraph or clause included in that and it increases by CPI (consumer price index).
“[For example,] if I’m paying $50,000 rent now and CPI goes up 3 per cent, then the market value of the property also goes up so the rent I’m paying is now less than market rate, yet it’s in line with the lease agreement, is what we are talking about.
“Would that same situation arise if the tenant was unrelated? Yes, it would. If you have got an unrelated tenant and they are locked into this same lease agreement, the same situation would apply to them and therefore I would accept that.
“When it comes time to renew the lease in three years or on each term, the whole lease might look completely different as it might with an unrelated party.
“My view again [with the new lease is] does it resemble what a lease would look like if the tenant was unrelated? If the answer is yes, I accept it.”
He added rent paid in advance under a lease from a related party would also be accepted under the same conditions as it was not uncommon outside the SMSF sector.
“When it’s in arrears, I have an issue and I had this problem recently with an SMSF that has a related party occupying the fund’s property,” he said.
“They have paid a year’s worth of rent in June and saying it’s prepaid rent in advance. I’m saying documentation doesn’t support that, but rather states it is in arrears.
“In advance I’ve got no issues, but the tricky thing is proving whether it’s in advance or if it’s in arrears, unless you get documentation for the very first year.”
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