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In a recent webinar for The Knowledge Shop on SMSF and property, superannuation adviser Natalie Scott said lease agreements are an important aspect in providing evidence of NALI, particularly to the auditor, and also important in demonstrating a lease is on arm’s length terms.

“Where that is particularly important is when you have an SMSF that’s leasing a property to a related party,” Ms Scott said.

“That touches back on the business real property definition. We can generally not have related parties in an asset that is owned by the SMSF.

“However, if the property is used in a business and meets the business, real property definition, and we can lease it to a related party, we need to make sure that that lease is on arm’s length terms.”

Ms Scott said the best way to prove to an auditor a lease is on arm’s length terms is via the lease agreement.

“It’s best to make sure that the SMSF, or its trustee or accountant, is not preparing the lease agreement,” she said.

“A lease agreement should be prepared by a legal adviser and accountants should not be doing that.”

Ms Scott said it also essential for a property’s market valuation to be correct if it’s being invested in.

“Quite often the property is the main asset of the fund, so it’s really important that we have an accurate valuation and it reflects the true value of the property,” she said.

“The auditor is going to want to see documentation of that and it might require an independent valuation.”

When investing in a property, an SMSF has to have documentation and evidence from the beginning of the process, she said, including the initial deposit to ensure that NALI regulations are being followed.

“A lot of people want to pay the deposit out of their personal accounts and have a reimbursement from the SMSF once the transfer occurs, because in practice, what often happens is the person quite often will find the property before they’ve set up the SMSF,” Ms Scott continued.

“Quite often in those cases, you don’t have the time to process the rollover into the fund.

“You really need to look at other ways of paying the deposit. It is possible to have the SMSF reimburse the member for the deposit provided that the trust date allows for reimbursements and this can be done fairly quickly.

“While an SMSF could pay directly to the vendor for the purchase I would generally suggest making a contribution into the superfund and then making the deposit from there if the time allows.”

The next step in the documentation process is ensuring the contract of the purchase is in the correct name and that the settlement documentation is kept secure.

“The amount of property purchases that I’ve prepared that didn’t have either the contract or settlement documentation is in the hundreds,” Ms Scott said.

“If you’re aware of a sale happening, make sure you have a chat with your client about the importance of keeping the documentation and even suggest they send it through to you so you can have a copy on file for when you’re doing financials for that year.”