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What should we do in this case to verify that the income from advance rent is not NALI if the tenant is not a related party? What should we check that this payment is actually made by the tenant? Is this taxable in the year of receipt?
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Hi Gulshan, a SMSF is normally taxed on a cash basis rather than an accruals basis so the rent would be taxable income in the year it is received.
A SMSF can receive rent 2 years in advance as long as it has been received on an arm's length / commercial basis (as per section 109 of SIS). As you noted if the rent has not been received on an arm's length basis it is at risk as being NALI and being taxed at 45%.
As the rent may not be deductible to the tenant as it has been prepaid for a period greater than 12 months as auditor I would do the following (due to arms's length rules / NALI concerns):
1) Review the relationship between the SMSF / tenant to see if they are related parties.
2) Request confirmation from the Fund / tenant that they are not related parties.
3) Request confirmation of rent paid in advance by the tenant.
4) In the Trustee representation letter insert a paragraph in relation to the rent in advance / and the relationship with the tenant.
5) Raise a management letter item that explains the NALI rules to the Trustees.
Thanks
SMSF AAA