Issues arise when the lease may not be in writing and even when it is in written form, the tenant often does not comply with the terms. The rate struck is also often not the supportable market rate and/or the terms of the arrangement are often not commercial in nature.

“There is often a lack of evidence supporting the rent that’s being charged at market rates. Overcharging rent, for example, can be a way of moving more cash into the super fund outside of the contribution limits,” Ms Galstyan said.

“On the other side, if a related party tenant is struggling financially – as has sometimes been the case during COVID-19, the fund may under-charge the rent and not have support for the market rate, or COVID-19 relief, when it is provided.”

In both respects, Ms Galstyan noted this has potential issues for the fund’s compliance with the arm’s length provisions, S109 of SISA.

The timeliness of rental payments in accordance with the agreement terms also supports compliance with arm’s length provisions of SISA. 

Ms Galstyan warned that trustees should be wary when they propose to bring forward rent as a funding source as this may inadvertently create a non-allowable borrowing by the fund. 

Where such rental brings forward is proposed, the trustees should ensure this is documented including the basis, and that this basis is in line with industry practice between non-related parties.  

“When we’re talking about SMSF advisers, these are specialists who are licenced to provide financial advice. Lease agreements, however, are a legal instrument, and SMSF advisers should ensure they act within their field of expertise, and utilise other experts and resources to support trustees as required,” she explained.    

“The key is for the trustees to appropriately document the leasing arrangement and ensure this is complied with by the related party tenant. In our communication with our accounting and advisory firm clients, we always emphasise the importance of having documentation in place to support compliance. 

“Where this documentation and its practical implementation falls short, the SMSF trustees need to substantiate the decisions they have made in relation to that related party arrangement. Where this is not an immediate reportable non-compliance by the SMSF registered auditor, the trustee then has time to update their documentation to appropriately support SISA/SISR compliance going forward.”