SMSF Commercial Lease Agreement

SMSF Commercial Lease Agreement – including ‘related parties’

Your Self-Managed Super Fund (SMSF) can own commercial property. The SMSF can even lease commercial property to a member. However, the commercial lease agreement must comply with the law. Special rules in the drafting of the SMSF Commercial Lease Agreement are required.

Our SMSF Commercial Lease Agreement seeks to satisfy the Superannuation rules.

An SMSF must only benefit you when you have retired. You are not allowed to get any benefit from your SMSF. Sure, your superannuation belongs to you. But you cannot have it until you retire.

The rules are so strict that you cannot lease a residential property, car or artwork from your SMSF. Even if the rent was a fair market price. The one exception is ‘commercial real property’. Your SMSF can potentially lease commercial property to you, your family and other related parties.

Seven rules when leasing commercial property to ‘related parties’

Seven additional rules apply when a member leases commercial property from their SMSF. Special rules apply when an SMSF leases to a ‘related party’. Our SMSF Commercial Lease complies with the strict Superannuation law’s seven rules:

1. lease agreement – prepared by a lawyer
2. an arm’s length transaction – the SMSF cannot give ‘special treatment’ to a related party
3. market rent – the lease agreement allows you to reset the rent to market, as required
4. due payment – appropriate rent payment dates
5. recovery – the SMSF is required to take appropriate action to remedy any breaches
6. evidence – sufficient evidence and paper trail for the SMSF auditor and ATO. This confirms that no advantage is given to the member leasing the commercial property
7. legal – complies with Commercial Tenancy legislation throughout Australia and the Superannuation Laws

SMSF Commercial Lease fails ATO scrutiny

An accountant shows me a non-complying, self-managed super fund that owns commercial property. The problem? The SMSF does not have a legally drafted commercial lease. Although the lease complied with the law, it did not address the requirements of the SIS legislation and failed the ATO audit.

Your SMSF Commercial Lease Agreement must comply with both the state laws and the Commonwealth Superannuation law. If your SMSF is noncompliant, the ATO applies penalties and additional taxes.

SMSFs require specialist leases. The commercial lease should be subservient to the Superannuation rules. It is not enough to use a standard commercial lease. Legal Consolidated’s SMSF commercial lease complies with the SIS Legislation.

What happens when the SMSF leases to a non-related party?

Our SMSF Commercial Lease is designed for SMSFs. However, if your SMSF is leasing the commercial property to a non-related party, the Lease must still comply with the SIS Legislation.

 

 

 

 

Extra issues when leasing Commercial Property to a member of the SMSF

There are additional challenges when leasing to a member. For example:

1. Member gains an advantage from the SMSF. For example, the rent charged by the SMSF is too low. A member illegally gains an advantage.

2. The member gives an advantage to the SMSF. For example, the rent is too high, so the member illegally injects funds into the SMSF. This is a contribution by the member or a ‘related person’.

SMSF ‘Related people’ include:

• members
• associates of members
• relatives of members
• business partners and their spouses and children
• trusts controlled by members or associates
• companies controlled by members or associates

The ATO watches ‘related party’ transactions closely.

Therefore, the lease between the SMSF and the member must be at arm’s length. The SMSF cannot give ‘special treatment’ to a related party in the commercial lease. The trustee cannot give ‘favours’ to the leasing member.

You must have:

1. a legally prepared and legally enforceable written lease agreement – designed for the SIS legislation
2. rent paid on time as required by the Commercial Lease Agreement
3. the SMSF taking appropriate action to remedy breaches

There are many SMSF rules in leasing. Legal Consolidated follows them

Our firm’s Commercial Lease Agreement complies with up-to-date Superannuation law, including:

* Superannuation Industry (Supervision) Act 1993
* Superannuation Legislation (Consequential Amendments and Transitional Provisions) Act 2011
* Superannuation (Financial Assistance funding) Levy Act 1993
* Superannuation (Resolution of Complaints) Act 1993
* Superannuation (Rolled-Over Benefits) Levy Act 1993
* Superannuation Industry (Supervision) Consequential Amendments Act 1993
* Superannuation Supervisory Levy Amendment Act 1993
* Occupational Superannuation Standards Amendment Act 1993
* Superannuation Act 2005
* Superannuation Act 1990
* Superannuation Act 1976
* Superannuation (Productivity Benefit) Act 1998
* Superannuation Benefits (Supervisory Mechanisms) Act 1990
* Superannuation (Family Law – Superannuation Act 1922) Orders 2004
* Superannuation (Family Law – Superannuation Act 1976) Orders 2004
* Superannuation Guarantee (Administration) Act 1992
* Superannuation Industry (Supervision) Regulations 1994

SMSF auditors require a copy of the lease before signing the yearly audit.

Our law firm’s SMSF commercial lease complies with the Superannuation laws, improving compliance. We also make the auditor and ATO auditor happy (well, as much as they can be).

Special SMSF rules for lease disputes

Our SMSF Commercial Lease Agreement:

• accommodates low-cost dispute resolution alternatives. This complies with both state leasing and Commonwealth Superannuation Laws,
• reduces unconscionable conduct claims against the SMS,F
• is audit friendly for both your auditor and the ATO

Subletting commercial property in breach of the Superannuation Laws

The Tenant has no authority to sublet or assign under this Lease. This is unless the Landlord and Tenant mutually agree, subject to the Superannuation laws. The ‘waive and variation’ clause permits subletting and assignment — but is subject to the Landlord’s consent.

Fair Damages that do not breach Superannuation Contribution rules

If the Tenant (member) defaults on payment, the landlord (SMSF) recovers liquidated damages from the Tenant. It is important that this is not a ‘contribution’ to the fund. Our unique formula calculates damages that avoid ‘contribution breaches’ by the SMSF.

Without these pre-liquidated damages calculations, a commercial lease breaches the Superannuation law. Most Commercial Leases breach Superannuation laws.

Waivers ensure ongoing compliance with the SMSF Commercial Lease Agreement

Many lease agreements cannot be updated. However, if the Superannuation laws change, then this may render your SMSF non-complying. You suffer penalties of up to half the value of your SMSF.

With our lease, the Landlord and Tenant can exchange emails to alter the Commercial Lease.

SMSF Lease vs Sublease vs Assignment of Lease

Consider a ‘sub-lease’ and an ‘assignment of lease’:

• Sub-lease: The Tenant signs a Lease. But the Tenant does not need all the space at the moment. So the Tenant tries to ‘sub-lease’ to a third person. 
• Assignment of lease: Or, your tenant wants to vacate early. The tenant finds a replacement tenant. The SMSF, as the landlord, signs an Assignment of Lease.

Subleases and lease assignments are common and legal. However, when an SMSF leases commercial real property, building a brand new Commercial Lease is better.

Under the SIS regulations, sub-leases and lease Assignments may be considered too complex or confusing. The SMSF auditor may want to investigate further, ask the SMSF for more information, and get external consultants to sign off on the chain of events.

If you can, then a new SMSF Commercial Lease is simpler and safer.

Auditor and SMSF Lease

If the ‘business real property’ is leased, your auditor looks for an up-to-date:

1. SMSF lease; and
2. property valuation.

This is especially true if the SMSF is leasing to related parties. Ensure the lease is on an arm’s length basis. You need fair market rent. Otherwise, the SMSF is taxed at 45% on its non-arm’s length income.

The SMSF auditor for Commercial Lease reviews:

1. Does the related-party tenant satisfy the terms of the lease?
2. Has the related party tenant paid all the required rent and outgoings?
3. Is the Lease Agreement prepared by an Australian lawyer? If not, is it an enforceable and genuine legal document? Who will check it?
4. Any rent adjustments? Are they consistent with market rents?
5. If the rent is indexed for inflation or some other formula, is the tenant paying this higher rent?

SMSF Property in a Custodian (Bare) Trust? 

An SMSF can not borrow money because it is considered too risky. However, there are exceptions to this rule. One exception is borrowing money through a ‘Bare Trust’ (Custodian Agreement).

In a property transaction involving an SMSF and a bare trust, the landlord is typically the bare trust’s trustee, not the SMSF’s trustee. The bare trustee holds the property title and acts as the landlord until the loan is repaid and the property is transferred to the SMSF.

How to structure a Commercial Lease for a Limited Recourse Borrowing Arrangement (LRBA)

Every superannuation law firm has its own view on how a Commercial Lease is set up when a Limited Recourse Borrowing Arrangement (LRBA) is in place.

An SMSF borrows to buy a property through a bare trust called a Custodian Trust. The Custodian Trust holds the property as a bare trustee for the SMSF. The Trustee of the Custodian Trust is the ‘legal owner’ of the property. Eventually, if and when the loan is paid off, the property is transferred into the name of the Trustee of the Self-Managed Superannuation Fund.

Who should be the Landlord? The trustee of the Custodian Trust or the trustee of the SMSF?

Legal Consolidated’s Commercial Lease has the landlord as the trustee of the Custodian Trust (i.e., the trustee of the Bare Trust). In other words, the Trustee of the SMSF is not the Landlord. The Legal Consolidated SMSF Commercial Lease helps manage the eventual transfer of property to the SMSF. This is how it works:

1. Initial Arrangement: During the period the property is under finance, the trustee of the Custodian Trust, as stated in Legal Consolidated’s Commercial Lease, holds the legal title and acts as the landlord.
2. Automatic Transition: The commercial lease automatically transitions upon repayment of the debt on the property and when the property is transferred. Under the Legal Consolidated Commercial Lease, the landlord’s role seamlessly shifts from the Custodian Trust’s trustee to the SMSF’s trustee.
3. Simplified Process: This transition in Legal Consolidated’s Commercial Lease occurs without any manual intervention or additional documentation to the Commercial Lease. It streamlines the process and helps ensure compliance with superannuation and SIS regulations.

We have found that this approach satisfies both your auditor and the regulator, the Australian Tax Office.

An auditor has argued that an SMSF Commercial Lease must always have an ‘automatic transition’ clause. Legal Consolidated SMSF Commercial Lease always do. However, we have reviewed the law and the ATO’s rulings on this, and we are of the view that while an ‘automatic transition’ clause is best practice and ‘pleases’ the ATO, it is not a mandatory requirement in an SMSF Lease.

Who is the Landlord while the property is in an SMSF Bare Trust (Custodian Trust)?

Here is an example of a Commercial Lease where the SMSF is gearing the property through a Limited Recourse Borrowing Arrangement (LRBA):

• Keller Nominees Pty Ltd is the trustee of the Keller Super Fund.
• The Keller Super Fund borrows money to fund the purchase of a commercial property.
• To allow for this, the Keller Super Fund holds the property through a non-recourse loan made through a separate company that holds the property in a bare trust.
• We will call the separate entity 238 Adelaide Terrace Pty Ltd ACN 88383763838 as trustee for the 238 Adelaide Terrace Custodian Bare Trust.
• The Keller Super Fund now wants to lease out its commercial property.
• The landlord is 238 Adelaide Terrace Pty Ltd.
• Many years later, the money is paid back. The Keller Super Fund now transfers the property to the trustee of the Keller Super Fund Keller Nominees Pty Ltd.
• Without needing to amend the Legal Commercial Lease the landlord is now Keller Nominees Pty Ltd.

If the commercial property is in a Bare Trust, the trustee of the Bare Trust (only) is the Landlord. (The Trustee of the SMSF does not become the landlord until the property is finally transferred out of the bare trust to the trustee of the SMSF.)

The SMSF Custodian Bare Trustee is the Landlord during the Limited Recourse Borrowing Arrangement (LRBA) for a Commercial Lease

Here is another example:

• The trustee of the George and Jenny Superfund is a company Black Nominees Pty Ltd.
• The George and Jenny Superfund borrow money to purchase a commercial property.
• The Super Fund does this through a Bare Trust (Custodian Trust).
• The Trustee of that Bare Trust is White Nominees Pty Ltd.
• White Nominees is the Landlord (not Black Nominees Pty Ltd).

When the happy day comes that the property is paid off, then the property is transferred to Black Nominees Pty Ltd atf the George and Jenny Superfund. The Legal Consolidated SMSF Lease automatically caters to and allows for this future event.

Full free sample of a Self-Managed Superannuation Fund Lease Agreement

Press the PDF above to see our cover letter and a sample of a Commercial Lease for an SMSF.