Many of our SMSFs at Allan Hall own commercial property, either directly in the fund or via a connected property trust.
Often this commercial property is business premises leased to a SMSF member’s business. We refer to this as a ‘related party’ of the fund.
To ensure a fund’s lease arrangement with the related party complies with Australian superannuation and tax laws, the SMSF trustee would generally need to:
- obtain a third party written opinion of the market rental to be charged on the property, ie from local real estate agent;
- enter into a written lease agreement with the related party on normal commercial terms. For example, the agreement should:
- specify the term of the lease agreement,
- require the payment of rent as per the third party opinion obtained,
- specify how often rent should be paid (usually monthly) and what action will be taken if rent is not paid on time,
- specify who (eg lessor or lessee) will be responsible for the payment of outgoings including rates, strata levies, insurance etc (the third party opinion obtained will often specify who should ordinarily be responsible for these costs), and
- specify how and when the rent should be increased, ie with CPI or reviewed to market;
- ensure all transactions are in accordance with the lease agreement. For example:
- if the lease requires rent to be paid on a monthly basis, the trustee should ensure the fund or trust receives the rent on a monthly basis,
- if the lease requires costs such as rates, insurance etc to be met by the lessee, the fund or trust should not ultimately bear these costs and should ensure these are invoiced back to the tenant; and
- if the lease requires the rent to be increased with CPI on each anniversary of the lease, the rent should be appropriately increased.
- ensure any insurance policies over the property are registered in the name of the fund or trust, or where in the name of the lessee, the fund/trust should be noted as an interested party on the policy, and
- if appropriate, renew the lease agreement on its expiry based on an up-to-date third party opinion of the market rental to be paid etc.
If your SMSF owns property, either directly or indirectly that’s leased to your business or other related party, please double check the lease terms and make sure any rent reviews are up to date and rent and expenses are being dealt with in the right way at the right time (ie in line with the lease).