Financial Assistance Dressed Up As Renovations - Guide For SMSF

As the old saying goes, mutton dressed up as lamb will always be mutton. And the same applies to financial assistance in the SMSF realm.  It is common for SMSFs to own business real property which they lease to a related party of the fund for the purpose of conducting the related party’s business. Now, we are all very clear that the dealings have to be “arm’s length” but it is sometimes difficult to isolate the interests of the SMSF and the related party as we are only human (or sheep).

Let’s consider the below scenario:

Mr and Mrs Hogget are members of the Baa Ram Ewe Superannuation Fund and are running a business in their individual capacity known as "Sheep be True". Baa Ram Ewe Superannuation Fund (herein “the SMSF”) owns a commercial office which is leased to Mr and Mrs Hogget trading as Sheep be True (herein “the Business”) for a period of 5 years and it’s currently about half-way through the term. The Business decided that they would like to renovate the office to a first class premises by investing in top quality office furniture, printing and computer machinery, Bosch commercial kitchen and a water-feature stone wall. The Business decided that the renovations should be paid by SMSF at the outset and repaid by the Business by way of an amendment of the lease to include an amortisation for the cost of the works over three (3) years. The parties are trying to avoid doing a loan agreement to avoid contravening section 65 SISA (Lending to members of regulated superannuation fund prohibited).

The answer is, if it looks like mutton… it’s mutton.

There is not a butcher on this earth who can dress that mutton up as lamb.

The same applies to the amortisation proposal. Regardless of what form it is in, the long and short of it is that the SMSF is providing a lump sum, for goods to be used by the business, to be repaid over a period of time and the ATO would likely consider that it would be financial assistance.

There are circumstances where the situation may be different. For example, if the premises were damaged in a storm, SMSF would pay for the cost of the rectification works as this would be a usual commercial arrangement that one would see between Lessor and Lessee. Also, perhaps at the outset of a lease, it may be in the SMSF’s investment strategy that the SMSF would fit-out the premises to a high quality standard and obtain a market valuation as to the rental. The related business Lessee can then pay the rental to the Lessor which is reflective of market value for a premises of that standard.

If Mr and Mrs Hogget ran Sheep be True as a trust or corporate entity, Baa Ram Ewe Superannuation Fund may be permitted to lend  up to 5% of its total assets however that is a yarn for another day! I think we will say “That’ll do pig” for today.

It is clear that each and every situation is different and we encourage you to contact one of our SMSF Experts for advices tailored especially for you and your fund.

SMSF advice today keeps the ATO at bay… It’s sheeper than you think.