One of the key concepts with having an SMSF, is that as trustee you must preserve the assets of the SMSF for your retirement.Ā 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 ā itās 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, itās 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.Ā 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 āgood faith leasing principlesā 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 tenantās 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 tenantsā 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 itās 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.Ā These type of transactions are generally determined by the current market situations.Ā 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.Ā Obviously, if the reverse is true you could increase the rent on the premises.Ā 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.Ā This is the amount for which a lease is established between your business and the SMSF.Ā As you are keeping the āarms lengthā aspect of the transaction, it is important to organise a lease for the property ā 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.Ā These are the terms of which the auditors will review to assess if the property is truly meeting the definition of āarms lengthā.Ā Please note, if you are not going to comply with the term, do not include it.Ā 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.Ā Responses to this request for new market valuations are generally met with; āwhy do I have to provide another market value, we have a lease in place?āĀ Very true, a valid commercial lease is in place and has ensured that the SMSF has complied with the relevant legislation.Ā 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.Ā 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.Ā Ā 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 havenāt obtained a market valuation for a few years, we will be asking for one, as well as a current lease if we need to.Ā 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 ā inclusive of GST?Ā If the lease isnāt working for your business, consider putting a new one in place, remembering that rent must be market value to ensure compliance.
Related Articles
- 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.
9 comments
Anne
November 13, 2017 at 11:43 am
Hi, We have a SMSF and we have bought an investment property with LRBA and set up a Bare Trust. What name should be on the Lease Agreement, the Bare Trust name or “name P/L ATF name super fund”. Our Accountant is saying Bare Trust and our property manager is say the other.
Thanks A
SOPEE SOO
February 4, 2023 at 9:17 am
CAFE- I am in this situation where my lease expired on 30 June 2022 with an option to renew for a further 5 years. We have decided not to renew the lease because of the many previous and current economic effects ie increased food cost, increase electricity & gas, increase wages, fewer customers ie working from home, fuel prices increase, new competitors, and now an increase in market rent. If we pay the new Market rent then this will be an increase of $850 per month Net + all outgoings (all increased) and GST ON THE RENT.
questions:
1. do I have to take up the option of 5 years and can I negotiate the market new rent due to the above factors mentioned.. if by law we pay the market rent then our business can not afford this and I would be forced to close my business in my SMSF property.
2. If I donāt have to take up a new lease how is the rent assessed market rent net GST and all outgoings or current rent net GST with CPI increase + all outgoings?
Please share your advice on the above
Kris Kitto
February 6, 2023 at 10:13 am
I will answer with the assumption that you are running a business (cafe) and that the cafe business is leasing the premises from your SMSF.
There is nothing stopping a tenant and landlord from negotiating a new lease at any time. You are never forced to take the option of extending the lease.
You SHOULD obtain an independent rental assessment at least every 3 years, or when there are significant changes in the market. The key part is INDEPENDENT.
I’d suggest you get in touch with a local commercial real estate agent who leases similar properties in your area. If the market has changed (due to local economic conditions) get an updated appraisal as the basis of a new lease. The appraisal will specify what outgoings are included and the applicable CPI increase etc.
The SMSF has to charge a market rate lease to your business and enforce it exactly the same as if the SMSF was leasing the premises to an unrelated third party.
I understand that it is tricky because you are wearing two hats – one as trustee of the SMSF (landlord), and the other as the business owner (tenant), and there is an inherent conflict between the two. I cannont provide any further guidance specific to your situation. All the best!
Christopher Nikolovski
June 29, 2023 at 10:07 am
Where there is an existing lease agreement in an SMSF with a related party can the rent be increased? What documents need to be produced/issued.
Kris Kitto
June 29, 2023 at 10:10 am
Of course it can, provided the terms of the original agreement enable it.
You would need to obtain an updated rental appraisal and valuation from either an agent (with comparable rents) or an independent valuer.
Either a new lease agreement would be needed or an addendum to the existing agreement.
The key thing is ensuring the lease is at market value and you have evidence to support that.
Darren McKean
November 19, 2024 at 5:56 pm
Is there a cap to the number of years you can establish a commercial lease for where a SMSF leases farmland to a related party? I’d prefer to do 3 years with a 3 year option though someone said the ATO is cracking down and preferring shorter (like 1 year) leases which would mean several thousand more $ in solicitor costs over a 6 year period.
I spoke with the ATO though they didn’t really have an answer for me which is what I usually get which I’ve never understood.
Kris Kitto
November 20, 2024 at 7:26 am
Any lease needs to be at arms-length.
If a 3 + 3 year lease is normal for arrangements between unrelated parties, then it’s also OK between SMSF and related party business, but if 1 year leases are the norm, then that’s how the SMSF should deal with a related party tenant. It will depend on the specific type of property.
There is no specific cap on the number of years for a commercial lease between an SMSF and a related party for farmland. However, there are some important considerations to keep in mind:
1. Arm’s length terms: The lease must be on commercial, arm’s length terms regardless of the duration[1][2]. This means the rent and other conditions should be comparable to what would be offered to an unrelated party.
2. Regular review: Even with a longer-term lease, it’s advisable to have provisions for regular rent reviews to ensure the arrangement remains at market rates[1].
3. Documentation: The lease should be properly documented, regardless of duration[2].
4. Auditor scrutiny: SMSF auditors will closely examine related party leases to ensure they comply with regulations[3].
While there’s no rule mandating shorter leases, the ATO’s increased scrutiny may be prompting some to opt for shorter terms to demonstrate more frequent market-based reviews. However, a 3-year lease with a 3-year option is not inherently problematic if it meets all compliance requirements.
To balance compliance and cost-effectiveness, consider:
1. Ensuring the initial 3-year term and the option are both at market rates.
2. Including annual rent review clauses based on CPI or market rates.
3. Documenting the process used to determine market rates.
4. Keeping detailed records of how the lease terms were set and reviewed.
By taking these steps, you can potentially justify a longer lease term to your auditor and the ATO while minimizing legal costs associated with frequent renewals. However, it’s advisable to consult with your SMSF advisor or a legal professional to ensure your specific arrangement complies with current ATO expectations and SMSF regulations.
Citations:
[1] https://www.superconcepts.com.au/SMSF-insights/blog/smsf-insider/2023/02/28/tree-change—smsf-style
[2] https://taxquestions.com.au/buying-a-farm-to-retire-to-in-your-smsf/
[3] https://www.smsfadviser.com/strategy/22503-the-3m-cap-will-play-havoc-down-on-the-farm
[4] https://www.accountantsdaily.com.au/regulation/20334-millions-of-landlords-the-target-of-expanded-ato-crackdown
[5] https://smsfaustralia.com.au/can-my-smsf-buy-a-farm/
[6] https://community.ato.gov.au/s/question/a0J9s000000R8K3/p00222586
[7] https://community.ato.gov.au/s/question/a0J9s000000L2VU/p00175413
[8] https://www.ato.gov.au/law/view/print?DocID=SFR%2FSMSFR20091%2FNAT%2FATO%2F00001&PiT=99991231235958
Leaner
February 6, 2025 at 10:21 am
Our SMSF owns the our business premises, we have a lease agreement that we are renewing. Can the landlord (SMSF) pay the power outgoings for the building under the new lease? It already pays strata and water.
Kris Kitto
February 6, 2025 at 11:46 am
Electricity is typically a business operational expense, not a property related expense.
Lease agreement must must be at market rates and conditions, so would the provision of electricity be included in the lease in the wider market? Probably not.
The SMSF must act on an arms-length basis with all parties, so would an unrelated landlord pay for the electricity for their tenant? Probably not for business premises.
So based on the very limited information provided, I would say no.