My client’s Self-Managed Superannuation Fund (SMSF) is buying a commercial property. What will I need to provide for the audit?

When an SMSF buys a commercial property, certain documents and evidence need to be provided for the audit. The specifics depend on whether the property is being acquired from a related or non-related party – in short, it all comes down to who the SMSF is doing business with.

Dealing with a related party

Whenever an SMSF does business with a related party, all dealings must be strictly on arm’s length terms. In other words, you must show that the transaction arrangements are made without one party influencing or having more control or bargaining power than the other. This rule applies to both acquiring the property and leasing it and must be supported by good quality documentation.

If the property is being acquired from a related party, you will need to show that the purchase, including all the terms of use, is allowed. The required documentation includes:

  1. Independent Valuation Support:
    • Obtain a proper valuation to show the property is being purchased at market value.
    • The valuation should include a detailed description of the property, its location, comparable sales of similar properties, and market rates of rental achievable (if leasing).
  2. Purchase Contract:
    • Ensure the purchase contract is in line with market value and normal commercial arrangements.
    • Ensure commerciality with the deposit, settlement terms and anything else you would usually expect to see in a sale contract.
  3. Settlement Statement:
    • Provide the settlement statement along with the purchase contract.
  4. Signed Legally Enforceable Lease (if the property is leased to a related party):
    • The lease must be on normal commercial terms at market rent as per the valuation support.
    • Allocate property expenses to the lessor and lessee in the usual commercial manner.
    • Provide for rent reviews consistent with regular commercial leases, typically performed annually.

Dealing with a non-related party

If the property is being acquired from a non-related party, the auditor will require:

  • A copy of the purchase contract
  • A copy of the settlement statement.

Additional tips for a smooth audit

Failing to provide the evidence and documents mentioned above may hold up the audit and lead to compliance issues, such as arm’s length breaches. Worse, non-compliance can result in the fund being taxed at the full tax rate.

In summary, make sure you submit the independent valuation report, purchase contract, settlement statement, and lease agreement with the audit documents. Proper documentation will help keep the audit process efficient, reducing turnaround time and audit fees.

If you have any questions about what happens when an SMSF buys commercial property, contact the AYS team today to make sure you have all the appropriate documentation in place for the audit.

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