One of the key concepts with having an SMSF, is that as trustee you must preserve the assets of the SMSF for your retirement. With that in mind, the ATO is exceptionally clear that as trustee you must not treat the assets or income of the SMSF as your own – it’s not, it belongs to your future self in the form of retirement income. Renting a commercial property owned by your SMSF?
With that in mind, it’s important to remember that when the SMSF owns a commercial property and you in your capacity of operating a business, lease the property, it must be treated as though you were in fact leasing the premises from someone else. This is what is referred to as Arms Length transactions.
Update 07/04/2020: Government Announces Code of Conduct for Commercial Tenancies
The Prime Minister has announced a mandatory code for commercial rents, which will apply if a tenant or landlord is eligible for JobKeeper payments and have turnover less than $50 million.The code will comprise “good faith leasing principles” that will be applied through binding mediation, and enforced in state and territory laws.
Landlords must reduce rents in proportion to the losses to their tenant’s business, and waivers must be at least 50 per cent of the reduction in turnover. They are also banned from terminating a lease or drawing on tenants’ securities.
Tenants must honour their lease.
Read more here: Code of Conduct for Commercial Tenancies including SMSFs
Update 28/03/2020: ATO Provides SMSF Rent Relief due to COVID-19
The ATO has announced it will not be taking compliance action for the 2020 and 2021 financial years where an SMSF provide rent relief to a related party business leasing commercial property from the fund. So if your business has a lease agreement with your SMSF for it’s premises / property being forced to pay market rent at while being impacted by Coronavirus is one less thing for business owners to worry about.
More here: SMSF Rent Relief for Related Party Tenants
Arms length transactions are the type of transaction where two independent strangers are making an agreement, neither one wants to get the worse end of the deal. These type of transactions are generally determined by the current market situations. Take Rent for example, if you were in an area that had surplus office spaces which high levels of vacant offices, most likely to get a tenant in the space, you would discount the rent. Obviously, if the reverse is true you could increase the rent on the premises. It comes down to market forces, supply and demand which will generally determine the rent that two independent parties will agree to.
How this applies to the commercial property owned by the superfund, is that at the point in time of renting the property, an independent third party, usually a real estate agent, will give you an estimate of what the place can be rented for. This is the amount for which a lease is established between your business and the SMSF. As you are keeping the “arms length” aspect of the transaction, it is important to organise a lease for the property – spelling out when the lease commences, ceases, options to extend, payment terms ie monthly, weekly, and who is responsible for the outgoings of the property. These are the terms of which the auditors will review to assess if the property is truly meeting the definition of “arms length”. Please note, if you are not going to comply with the term, do not include it. The auditors are not looking for what terms are in the lease, they are looking for compliance with the lease.
Three years pass, and we are asking for another market valuation for not only the property value but also the rent. Responses to this request for new market valuations are generally met with; “why do I have to provide another market value, we have a lease in place?” Very true, a valid commercial lease is in place and has ensured that the SMSF has complied with the relevant legislation. However, there are other sections of the SIS Act that clearly states that not only does the property have to be recorded at market value, any related party transactions must be done at current market values. In this instance, the rent between your business and the SMSF is to be reviewed, and at least every 3 years a written valuation from a third person must be obtained. Most situations, it is another piece of paper to obtain for us which the only impact you will notice will be that the market value of the property in the financial statements has changed, hopefully for the better.
So, when the 30th of June rolls around this year, please keep in mind that if you haven’t obtained a market valuation for a few years, we will be asking for one, as well as a current lease if we need to. Before 30 June, please take a minute to read your lease and assess if you are complying with the terms, such as payment of the outgoings, or even something as simple as, am I paying the correct rent – inclusive of GST? If the lease isn’t working for your business, consider putting a new one in place, remembering that rent must be market value to ensure compliance.
- How business owners can BUY their premises using their super – Part 1
- How business owners can BUY their premises using their super – Part 2
- ATO – COVID-19 SMSF Rent Relief
Interested in setting up an SMSF?
The following pages provides more information on how you can establish an SMSF: How to set up an SMSF
If you have any questions please contact Grow SMSF.