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Kylie Wee

Jan 22, 2024

Commercial property rent increased twice in a year

in SMSF Technical Forum

Hi All,

I am currently auditing a Fund which has invested in a commercial investment property via an LRBA. The investment property has been leased to a related party company. The term of the agreement is for three years. The rent was increased twice in year due to an increase in interest rate. There were no rental appraisal conducted prior to the increase in rent.

Could you please advise if it warrant an audit qualification under S.109 of SISA?

1 comment

Comments (1)

The Auditors Institute Ltd

Jan 22, 2024

Hello Kylie

Thanks for your question.

Section 109 of the Superannuation Industry (Supervision) Act 1993 is concerened with the situation where an investment made by a superannuation fund is on more favourable terms to the counter-party than what it would be if it was with an arm's length party (for example, if there was a discount tp market value rent on the rent charged to a tenant).

In the situation you describe, given there are rental increases triggered by unlerlying interest rate increases, section 109 does not appear to be problem.

Does the lease agreement expalin in clear terms when rent can be increased (and how often)? If so, and assuming the increases were consistent with the terms of the lease, then I don't see any problems.

Consideration should be given to section 290-550(1)(a) of the Income Tax Assessment Act 1997 and the non-arm's length income (NALI) provisions.

Section 295-550(1) An amount of ordinary income or statutory income is non-arm's length income of a complying superannuation entity if, as a result of a scheme the parties to which were not dealing with each other at * arm's length in relation to the scheme, one or more of the following applies:

(a) the amount of the income is more than the amount that the entity might have been expected to derive if those parties had been dealing with each other at arm's length in relation to the scheme;

If the rent charged is consistent with what an arm's length tenant would pay there should not be any NALI issues either.

Edited