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Where there is a lease arrangement between a SMSF and a related entity, and the related entity prepays rent to the SMSF, are there limits on the amount of rent that can be prepaid? I have been of the view that 12 months would be ok and generally this would be all that would be prepaid for tax deductibility purposes, however we have a situation where the related entity has prepaid 18 months rent so just wondering what the audit issues are with this, if any?
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Hi Peter
Thanks, I agree normally rent paid 12 months in advance is acceptable and will meet the deductibilty requirements for the tenant re the "12 month rule".
From an audit perspective section 109 of SIS is relevant as has the rental been received on an arm's length / commercial basis (given a related party is the tenant)? At a minimum you would expect a resolution / minute from the trustee explaining how this section has been met re the prepaid rental.
Also from an accounting perspective how has the rental been recorded from a tax return and financial statement perspective? Has a liability been recorded in the financial statements of the Fund re the prepaid rental?
I would also be concerned re the NALI provisions where if income is received higher than if the parties had been dealing with each other on an arm's length basis then the income could be taxed at 45%.
Extract re NALI legislation is below:
INCOME TAX ASSESSMENT ACT 1997 - SECT 295.550 Meaning of non-arm's length income
INCOME TAX ASSESSMENT ACT 1997 - SECT 295.550
Meaning of non-arm's length income
(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;
Thanks
SMSF AAA