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I'm auditing a fund where the SMSF purchased a vacant block of commercial land. The property purchase was at arms length. It is a two member mum and dad fund where dad is a registered builder. He has built a shed on the vacant land for as far as I can tell at his usual commercial rates. There is no borrowings involved. The shed will be rented out to an unrelated third party at market rates. Is the member allowed to enter a contract with his SMSF to build the shed? If so, apart from the contract, what other documentation should I be requesting to have on file?
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Hi David
Yes the SMSF can enter into a contract for the trustee / builder to build the shed.
You would need documentation to support that the amount charged has been done based on an arm's length basis. The trustee should provide documentation to support this. It should also be referred to in the Trustee Representation letter to the auditor.
I note that the ATO recently released on 28 July 2021 Law Companion Ruling LCR 2021/2 "Non-arm's length income - expenditure incurred under a non-arm's length arrangement". Refer example 10 below that supports the view that the SMSF can engage the trustee / builder to build the shed:
"Example 10 - SMSF trustee carrying out duties - individual capacity
70. Jean is the trustee of his SMSF of which he is the sole member. He is also a licenced electrician by trade. The SMSF owns a residential property which it leases for a commercial rate of rent.
71. Jean undertakes electrical work on the rental property that can only be done by a licenced electrician. In that instance, the work done by Jean is not as trustee of his SMSF but in his individual capacity. Jean charges the SMSF the commercial rate for the work undertaken on the rental property. Accordingly, the non-arm's length expenditure provisions will not apply."
Thanks
SMSF AAA