.png)
This is the first year I am auditing this fund. The fund owns business real property and leases it to the member's business.
The trustees are unable to provide me a copy of the lease agreement covering this financial year. However, they have provided me the newest lease agreement that covers the next financial year onward. The new lease implies the existence of a prior lease as it references a prior date of right to occupancy from years prior.
The issue is I cannot verify whether a lease agreement ever existed for this period of audit. I note that the previous auditor did not qualify the audit report in the previous fiancial year.
Would a qualification of Part B of the audit report be sufficient here, on the basis of having insufficient evidence of a lease agreement for this financial year? Or would a lodgement of a contravention report be appropriate, on grounds of IHA rule breach?
Thank you.
Hi Jason
My view is that it is not a breach of the in-house asset rules as a SMSF can rent business real property to a related party.
If you were to qualify the audit report and lodge an auditors contravention report it would normally be in relation to section 109 of SIS that requires (per the audit report):
"All investment transactions must be made and maintained at arms-length – that is, purchase, sale price and income from an asset reflects a true market value and or rate of return".
That is the parties were not dealing on an "arm's length" basis if no lease agreement was prepared between the SMSF and the related party.
An approach maybe to only raise it in your management letter if you are satisfied that the rent that was being paid was done on a commercial basis (eg monthly rent paid at an amount determined by a property valuer) and given that a rental agreement has now been obtained (re rent going forward).
If other forum members have a view please let the forum know.
Thanks
THE AUDITORS INSTITUTE