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Julie Flatman

Aug 31, 2021

Non-arms length dealing?

in SMSF Technical Forum

I'm auditing a fund that bought a commercial property from an unrelated party. There was a lease in place with a related party tenant at purchase (the lease was assigned to the SF on settlement). The rent is at market rates.

Issue - the related party tenant prepaid the rent on 4/11/20 for a period of 1 year and 5 months. Settlement occurred on 13/11/20. The accountant has said the date was too early because the parties were eager to settle and the prepayment was a tax planning decision on behalf of the tenant.

Also noted, before the prepayment of rent the SF did not have enough cash or other assets to fund the amount required for settlement on the property.

* how can it be tax planning when the prepayment is longer than 12 months so not deductible up front anyway.

* receiving rent before settlement - is this nali or actually a loan?

I'm having trouble determining what the exact issue is. Any help would be greatly appreciated.

Thanks,

Julie

2 answers1 reply

Comments (3)

THE AUDITORS INSTITUTE

Sep 03, 2021

Hi Julie

Thanks, yes I am still concerned that the rent received could be deemed to be NALI.

Section 295.550 of the ITAA 1997 states that income is NALI if income is more than what the Fund would expect to "derive" had they been dealing with each other on an arm's length basis. In effect as you note they have received an arm's length income overall but part has been received in advance. As income has been received in advance of when expected it has not been received on an arm's length basis and therefore in my view it could be deemed to be NALI.

An option could be to lodge an audit contravention report (ACR) in relation to the breach of section 109 and also raise your concerns re NALI (in the ACR). You would need to advise the trustee in relation to the breach of section 109 and your concerns re NALI.

Again it would be great to get other member's views as to how they would act in such a situation.

Thanks

SMSF AAA