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The SMSF has a lease agreement with a related party, the property was leased to the member's business as office.
The lease agreement says the tenant is responsible 100% of the total property outgoings. In the estimate outgoing information to tenant, it specifies the estimated expenses of bodycorp, fire protection services, rate, water and did not mention the estimated of land tax expense.
The 2023 financial accounts shows the SMSF has paid bodycorp, land tax, rate & water expenses.
My queries are:
Who responsible to pay the land tax? Should the tenant response to paid it as lease agreement says 100% of the total property outgoings are required to be paid by the tenant?
As the related landlord and tenant did not ahead the lease agreement, did it breach s109 arm's length?
If it is breached s109 arm's length, how to work out the contravention amount?
NALI arises where the loss, outgoing or expenditure is less than what would have been incurred OR there was no loss, outgoing or expenditure incurred compared to what you would expect when the parties were dealing at arm’s length. In this case, the expenditure is more that what would have expected, it seems it seems no NALI arises. Is it correct?
Did NALE arises? How to work out the contravention amount?
Should the contravention amount be taxed 45% and presented in the financial report?
Did the fund beach breach s65 provide financial assistance to member and relatives? It seems not, as the tenant is a related company. Is it correct?
Any other audit issues?
Hi Linda
Firstly the rules re whether a tenant can pay land tax are complicated and will differ depending on what state the property is located in.
In Victoria as an example a landlord cannot get a tenant to pay land tax if it is a lease covered by the Retail Leases Act 2003. To read further go to:
Yes, if the SMSF & tenant did not follow the lease agreement you could argue there has been a breach of section 109 of SIS in that they have not acted on an arm's length basis. A common approach in these types of situations is to take up a debtor or creditor in the Fund's accounts so that the lease agreement is followed. For example, if rates have been paid by the Fund and not reimbursed by the tenant as the lease agreement has not been followed then a debtor is taken up in the Fund's financial statements.
Yes the income is not more than what would have been expected so you do not have NALI. You also do not have expenditure that is less than what would have been expected so you do not have NALE.
My view is there is technically not a breach of section 65 as financial assistance has not been given to a member or relative. You have noted that the lease is to a related company, that is the financial assistance is not to a member or relative.
As noted above attempts should be made so the the SMSF and tenant follow the lease agreement so that you do not have a breach of section 109 of SIS.
Thanks
The Auditors Institute