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The super fund sold the property in the current year. Over the past few years, the member's family trust carried out renovations/repairs on the property owned by the SF but never charged the Super Fund for that work. The main costs are materials and labor. The family trust wants to issue invoices now to the Super Fund for the work that has been done. The invoices include the family trust’s costs plus a margin.
This is the first year for us as an auditor, all previous audit reports are unqualified.
In addition to the breach of S66 and S109 and potentially S62 is there any additional breach we have to report as Trustees don't want to revise the previous year's accounts?
Hi Umesh
There are a number of issues / problems & they include:
1) Section 109 - investment transactions not made on an arm's length basis.
2) Section 66 - acquisition of assets from a related party in relation to the materials acquired by the Fund.
These would be the sections that I would consider as part of any audit report qualification and the audit contravention report.
In the management letter to the trustees I would refer to that the increase in the value of the assets (re the non payment re work being completed) could be treated by the ATO as a contribution and also the capital gain from the sale is arguably non arm's length income (NALI) and then would be taxed at 45%.
In relation to NALI refer to:
LCR 2021/2
Non-arm's length income - expenditure incurred under a non-arm's length arrangement
"65. In respect of the second SMSF rental property, Trang undertakes a complete renovation of the bathroom and kitchen. She schedules time in her work calendar to undertake the work and uses the tools of her trade to undertake all plumbing work on the renovations. She also engages Novee in all works.
66. Trang does not charge the SMSF for the work undertaken in respect of the second SMSF rental property.
67. In this instance, Trang's use of the tools of her trade will not be considered minor, infrequent or irregular in nature. Considering all her activities, she will be considered to be undertaking these services in her individual capacity, rather than as trustee for her SMSF.
68. For the purposes of subsection 295-550(1), the scheme involves the SMSF obtaining the services from Trang and deriving the rental income. Trang not charging the SMSF for the services provided constitutes a non-arm's length dealing between the SMSF and Trang, which resulted in the SMSF incurring expenditure in gaining or producing rental income that was less than would otherwise be expected if those parties were dealing with each other at arm's length in relation to the scheme.
69. As such, there is sufficient nexus between the non-arm's length expenditure and the rental income derived from the second SMSF rental property. The rental income will therefore be NALI. The non-arm's length expenditure will also result in any capital gain that might arise from the subsequent disposal of the second SMSF rental property being NALI.
Thanks
SMSF AAA