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ยป Renting and leasing investment properties through your SMSF
Date published: 09/08/2011
Renting and leasing investment properties through your SMSF - Part III
This article is Part III in a series.
See Part I here - Acquiring property through your SMSF.
See Part II here - Examples of acquiring property through your SMSF.
While SMSFs are not legally required to have real estate agents manage their investment properties for them, many fund trustees and individual property investors prefer going down this route.
For many investors, getting a professional to do the job allows them to focus on more important issues such as running their own business.
Speak to any SMSF trustee and they’re convinced the best tenant for their fund’s commercial property investment is the business owned and operated by fund member.
However, from my experience, this is not always the case. What I have seen over the years is that leasing to fund members often results in lease agreements which are little more than a single written page and sometimes less. They neglect to spell out the term of the lease, make no provision for rental increases and fail to provide the landlord with any rights in the event of rent not being paid.
Renting to associates can also result in irregular rental payments and in some cases, no payment at all. While most landlords accept that late payment can occur from time to time, they would take action if this happened consistently or if there was a complete failure to pay. Basically SMSF trustee landlords should be no different. After all, they need to act in the best interests of fund members.
I’m often asked by clients if there is a way of avoiding these problems. There is, provided of course that you get a professional to manage the process for you. However, if you decide to go ahead and do it yourself, it is important that you view renting to an associate as no different to renting to someone who is at arm’s length.
Following negotiations over rental and lease conditions, the lease should be written up (ideally by your solicitor). This should stipulate:
• The rent, how much and when it is payable and when it will be increased.
• The term of the lease and renewal options.
• The rights and obligations of both the owner and tenant.
• What will happen if one of the parties fails to fulfil their side of the contract.
Once the lease has been written up, it must be signed by the property owner (you, the SMSF trustee) and the tenant.
In the example below, I have shown how things have the potential to spiral out of control when the fund is the landlord and fund members are the tenants.
I was recently asked to advise on a problem involving a two-member SMSF and a property it co-owned. The co-owner was a member of the fund. To complicate matters, ownership of the property wasn’t equal; the fund had 60 per cent and the member, 40 per cent. The problems started with the tenant – a business owned by both members of the fund. The business had been experiencing difficult trading conditions for three years and rental payments had been spasmodic and were well in arrears.
The member, who had 40 per cent ownership of the property, decided to take money equivalent to three years’ rental rather than her 40 per cent share of what had been paid. As a result, the SMSF was deemed to have ‘loaned’ money to the member; something which is prohibited.
Although the issue was not fully resolved at the time of writing this book, it is expected the fund will have to pay 46.5 per cent in tax on income earned over the past few years. It is also possible that the members will be banned as trustees and action will be taken to recover the debt.
Ideally what should have happened? The landlord (the fund) and the tenant should have stuck to the commercial lease agreement which had been drawn up. Unfortunately, they chose to ignore it.
If they had followed the requirements to the letter, the landlord would have taken action against the tenant, possibly evicting the tenant and finding a replacement.
Although this seems harsh, the SMSF would have behaved no differently with an arm’s length tenant.
The fund should also have insisted that the member who co-owned the property only take her share of the rental and not part of the SMSFs income.
If you are uncertain ask your accountant or superannuation adviser because, apart from the potential legal problems, it could prove costly to rectify.
This article was Part III and the last in the series.
Ms Lesley A Williams
Director - Major Street Publishing
This article is a chapter excerpt from: How to Invest in Property Through your Self Managed Super Fund by Martin Murden. Published by Major Street.
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or on the discussion forum) and/or request professional member(s) to contact you directly.
