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Where an SMSF owns a commercial property jointly with another related party as tenants in common and then lease the property to a related business (at commercial rates) however, where there is no lease in place between the parties does this create an audit issue and should the financial statements be qualified?
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Hi Ronald
Thanks. Section 109 of the SIS legislation requires that all investments must be made and maintained at arm's length. My view is that if a property is rented by a Fund to a related party (directly or via tenants in common) and there is no lease agreement in place this would normally be a breach of this section. This is because you would expect that an arm's length arrangement would normally require a lease agreement to be in place.
As a result my view is that the compliance audit report should be qualified and most likely an audit contravention report (ACR) should be lodged with the ATO.
The best course of action is to get a lease agreement prepared and signed. Then if an ACR is to be lodged you can advise the ATO that the breach has been rectified.
Thanks
SMSF AAA