Hi SMSFAAA Team,
One fund I am auditing owns a rental property. The sole member is 55 years old.
The property has not been rented since December 2018 due to renovations.
However, the renovations are finished now but the property is still not rented.
I have a declaration stating that the property has not been rented to related party and that no rental income has been received.
I found out today that the trustee doesn't want to rent the property anymore (the member is quite rich and don't want to bother with renting). The accountant is saying that the asset could be seen as a growth asset and kept for the future gain in value. Would it be a breach of section 62?
Also, the member would like to live in the property in the near future (within 5 years) once he retires. What are the conditions to satisfy before he can live in there?
Please let me know.
Thank you in advance.
Yours Sincerely
Jean Rey
Hi Jean
Re the non rental of the property you would need to consider if there has been a breach of:
1) Section 62 - sole purpose test
2) Section 109 - investment transactions on arm's length basis
3) Section 65 - financial assistance to a member
4) Section 82 - 85 - in-house asset rules
Re the sole purpose issue and it not being rented different auditors may have different views (& it would be get those views). If the investment strategy supports the non rental of the property and that it is being held for capital gain then arguably there would be no breach of the sole purpose test. As auditor I would still question if the investment has been made on an arm's length basis. Normally you would expect that a Fund would want to rent a property for the rental return. I would be concerned if the reason it is not being rented is that the member wants to live in it at a future date as this could be a breach of the sole purpose test.
In relation to the member living in the house unless the asset is less than 5% of the Fund's assets he / she cannot live in it as it would be a breach of the in-house asset rules.
If the member met a condition of release (example turning age 65) the Fund could in-specie transfer the property to the member. Another option is for the Fund to sell the property to the member. The Fund would need to consider stamp duty / CGT implications re the transfer or sale.
Thanks
SMSF AAA