The Importance of formally documenting a SMSF Lease

When a Self-managed Super Fund (SMSF) purchases a commercial property, there are several requirements that must be followed so that the SMSF complies with the Superannuation Industry (Supervision) Act 1993 (the Act). One of these requirements involves having correct documentation of any leases for the Premises. Here is why it’s important:

Compliance with Regulations

The ATO requires that all SMSF transactions must be conducted on an arm’s length basis. This also applies to properties that are leased via a SMSF.  The lease must be on terms that are at market rates, and having the lease correctly documented will ensure that the SMSF is adhering to these terms.

Related Party Transactions

Special rules apply when an SMSF leases property to a related party. This could include members, associates of members, relatives of members, business partners and their spouse and children, or trusts and companies controlled by members or associates.

If the commercial lease is between the SMSF and a related party, there is a higher level of scrutiny on the lease to ensure that it is an arm’s length transaction. The SMSF cannot give any special treatment to the tenant. The ATO requires that the lease terms are fair and at market value and are exact about ensuring that there is no conflict of interest within the agreement, such as giving a heavily discounted rate.

Transparency

If a lease is correctly documented, then there is a clear record of the transaction and the terms of the agreement to protect both the landlord and tenants’ interests. This is particularly important for auditing purposes to demonstrate that the SMSF is complying with all of its obligations under the Act.

The key terms that ought to be covered by a lease agreement is the duration, review and adjustment of rent, payment of outgoings, permitted use of the premises, conditions around transferring the lease, maintenance and repair obligations, termination of the lease and other obligations of the landlord and tenant.

There are also benefits for both a landlord and tenant in having a properly documented lease:

• If the business is sold by the tenant entity (which may be a related entity of the SMSF landlord), then having a properly documented lease in place means that it can be assigned to the purchaser of the business so that the SMSF continues to receive the benefit of the lease and its protections after the tenant stops operating the business.
• Having a lease in place will also assist the SMSF landlord to maintain the value of the property as any purchaser of the land will be bound by the lease and will be interested in the yield produced.

Asset Protection

A property is only legally secured when the lease is completed in the correct form and properly executed. The lease outlines the key responsibilities of the SMSF as the Landlord, and the obligations the Tenant must uphold for the duration of the term. If there is no lease documented, this can have implications if a dispute arises between the Tenant and the Landlord.

Avoiding Penalties

There are serious consequences if a SMSF does not have a lease in the prescribed form and is therefore not complying with its obligations. The ATO can apply penalties as well as additional taxes on the SMSF. There is also the risk that a SMSF is no longer considered compliant which could have serious tax implications.

Please get in touch with our Corporate & Commercial Team if you require any assistance with documenting your lease or ensuring your SMSF lease is compliant.