WHAT YOU NEED TO KNOW
An area of concern, we continue to see SMSFs that do not have a lease agreement in place. Failing to have a lease agreement could be a compliance matter due to an often-forgotten requirement of section 71 of SISA.

REQUIREMENT TO HAVE AN ENFORCEABLE LEASE AGREEMENT
As detailed in 71(1)(g) of SISA, a lease arrangement between an SMSF and a related party is only exempt from being an in-house asset if the property is business real property and the property is subject to a lease arrangement enforceable by legal proceedings. From an audit perspective, we cannot conclude a lease arrangement is enforceable by legal proceedings if no lease agreement can be provided.

Where no lease agreement exists, the property is classified as an in-house asset and, as it usually is a significant asset of the SMSF, a material compliance breach will have occurred. The trustees are then faced with the prospect of having to dispose of the property if the ATO does not accept that simply implementing a lease agreement meets the disposal requirement of section 82 of SISA.

Therefore, lease agreements with related parties must be documented at the beginning of the tenancy.

To assist your clients in meeting their compliance obligations with related party leases, we highlight the following points for your consideration:

WHEN A LEASE ARRANGEMENT BETWEEN SMSF AND A RELATED PARTY COMMENCES

• The trustee should obtain an independent expert opinion of the market value of the annual rental. This should include an evaluation of whether a rent-free period and additional charges for car parks are applicable.
• A commercial lease agreement needs to be prepared, setting out the terms and conditions of the arrangement.
• Details of outgoings should be documented within the agreement with these marked to market.

DURING THE LEASE TERM

• The trustee doesn’t have to annually justify the commerciality of the lease arrangement to the SMSF auditor. For example, if the parties have entered into a 5-year lease agreement, the trustee wouldn’t have to obtain a rental assessment until the lease needs to be renegotiated.
• The trustee has to ensure the parties adhere to the lease agreement’s terms. This would include the correct rental amount being paid at the right time. Consistently short-paying or late-paying rental is not an arm’s length dealing.
• In good faith, alterations to the terms of the agreement during the lease term could be contemplated. However, variations must be justifiable and documented.
  
  WE’RE HERE TO HELP!
  If you have any issues, questions or feedback regarding our monthly SMSF Bulletin or if you’d like clarification or further advice on the content of this month’s edition or any other SMSF audit concern – don’t hesitate to reach out to me at +61 416 123 446 or trosati@rosatiwang.com.