.png)
Hi SMSFAAA team,
One fund is renting his commercial property to a related party. The lease agreement stipulates the tenant is responsible for 100% of outgoings.
However, the fund paid for the following expenses; Council Rates, Strata Levy Fees & Water Rates. I believe that Council Rates & Strata Levy Fees must be paid by the fund and not considered outgoings? Can you please confirm?
I am asking confirmation because the previous auditor raised concerns in her previous Management Letters about the fund not compling with the arm’s length requirements under section 109 of SISA because the tenant did not reimburse all outgoings despite the lease noting the tenant is responsible for outgoings.
Thank you in advance.
Yours Sincerely
Jean Rey
Hi Jean Rey
My understanding is that if a lease agreement said that the tenant has to pay for all outgoings then normally the main expense that is excluded is land tax.
I would expect that council rates and strata levy fees could be considered as outgoings and payable by the tenant if the rental agreement states that the tenant will pay for outgoings.
All states will have different rules on outgoings so you may need to check the relevant rules re the state that the property is in.
As an example in Victoria a landlord must give a tenant a written estimate of the outgoings pre the lease being entered into and normally each year.
Also re Victoria refer:
https://www.vsbc.vic.gov.au/wp-content/uploads/2014/08/vsbc-information-sheet-outgoings.pdf
It states:
"Some outgoings cannot be passed onto tenants
The Act provides that the following outgoings cannot be passed onto tenants:
• land tax;
• expenses that do not benefit the premises;
• contributions to a sinking fund for capital works;
• rent payable by the landlord in respect of any head lease;
• management fees, unless the management fees relate to the management of the building or shopping centre in which the premises are located;
• capital costs; and
• interest on borrowings.
Additionally, a landlord is not permitted to pass on costs in relation to:
• legal or other expenses relating to the negotiation, preparation or execution of the lease;
• obtaining the consent of a mortgagee to the lease; or
• the landlord's compliance with the Act."
Thanks
SMSF AAA