Your self managed super fund (SMSF) is able to buy your business premises, and then lease the property to your entity that conducts your business.
This article is about how the SMSF leases the property to a related party. We do not discuss how the SMSF buys the property in this article.
What you need to know
You need to ensure that the SMSF lease to a related party provides:
- A written lease is in place;
- That market rate of rent to be paid;
- Rent must be paid in accordance with the lease terms; and
- If rent isn’t paid, the SMSF should take steps to enforce the terms of the lease.
In our experience, some SMSF Trustees do not follow the rules which can of course, create all sorts of problems. If you don’t follow the rules, the SMSF Auditor may have to take action against you.
While the distinction between the landlord and tenant (given they are related parties) may seem artificial, SMSF Trustees must follow the rules or risk being in breach.
We talk about some of the main considerations listed above in more detail.
Market rent to be paid
The tenant must pay the SMSF a market rate of rent. You can’t decide what the market rental should be. You need to obtain an independent assessment of the rent from someone qualified, experienced and familiar with the market. You require a written valuation from a Valuer or a written market appraisal from a real estate agent.
The amount of rent must be reviewed in accordance with the terms of the lease to ensure that the current market rent is paid every year. You can’t just set it and forget about it.
An annual CPI increase during the term of the lease (often a 3 year term) will usually satisfy your obligations, but typically depends on the circumstances.
Where the lease is renewed for another 3-year term, you will need to repeat the process that you undertook prior to the commencement of the lease and obtain another valuation or written market appraisal. If you don’t, as we have seen, you will likely have issues with the SMSF Auditor.
The amount of rent payable each year should be confirmed in writing between the Landlord (SMSF) and the Tenant (You, your company or trust).
Written lease to be in place
You require a written commercial lease.
The terms and conditions of the Lease need to protect you (the SMSF) as the property owner– meaning now at the commencement of the lease, and later in circumstances where you sell the business and are no longer the tenant.
When the time comes to sell the business, the SMSF may want to retain ownership of the premises, and continue to receive a rent payment every month.
Get the lease prepared properly
By having a proper lease in place:
- You save legal costs by preparing a comprehensive Lease once, rather than a budget lease now & a comprehensive lease later,
- there is one less thing to worry about when selling the business,
- increased likelihood that the SMSF Auditor will be satisfied that there has been compliance with the rules
- when selling your business, the Buyer will review the Lease as part of its due diligence, a properly prepared Lease will give confidence to the Buyer that they have security of tenure over the premises.
The Lease is to be prepared like all other “arm’s – length” commercial leases – detailing, amongst other things:
- the lease commencement date;
- the length of the lease;
- the options to extend the lease for additional terms;
- how & when rent payment are to be made;
- who is responsible for the outgoings of the property;
- how annual rent adjustments are calculated;
- how market rent reviews are conducted when a new lease term is agreed.
Rent to be paid in accordance with the lease
Once the Lease has been signed and the Lease commences, the rent payments must be made as stated in the lease – for the correct amount and by the due date.
Higher rent can’t be paid to benefit the SMSF, nor can lower rent be paid to benefit the Tenant.
Outgoings will also be payable, in accordance with the lease terms. Where the rent includes an amount for outgoings, this amount would need to be allowed for when determining the market rent.
If rent isn’t paid, the SMSF to enforce the lease
If rent isn’t paid as required by the lease terms, the SMSF trustee needs to enforce the lease as any Landlord would in similar circumstances.
Therefore, the usual process of letters of demand, notices to remedy breach etc must be pursued in accordance with the law, until such time as the Tenant has complied with its obligations.
The SMSF Trustee needs to follow the rules when leasing business real property to a related party. The Trustee needs to remain mindful that rules can change, and therefore must keep itself informed as to any rule changes.
Having the Lease documents available, and all supporting documentation on hand will make the annual audit process much easier. You want to make the auditor’s job as simple and straightforward as possible.