Can I rent my SMSF property to a friend?

Yes.

However, being a SMSF property you need to ask the following questions before allowing your friend to become the tenant?

• Is my friend a related party of my SMSF?
• Is the property commercial or business real property?
• Is the property residential property?

Is there a formal lease agreement and are the terms and conditions at market value?

Why are the above questions important?

Fred, is a friend of yours and you might want to do him a favour but if you, as trustee of your SMSF, put your fund assets at risk or do not ensure you obtain the going market rate for rent you will possibly breach the sole purpose test, the in-house asset rules and the arm’s length income (NALI) rules,  The consequences for breaching the superannuation laws and the tax laws can result in substantial cash penalties imposed on the trustees as well as tax penalties imposed on the fund. Tax penalties for non-arm’s length income can result in tax of 45% on the net rental income flowing from the property plus on the capital gain when the property is sold (special rules apply to the calculation of NALI).

Is my friend a related party of my SMSF?

Fred is not automatically a related party of a SMSF because the two of you are friends. However, if you and Fred own a rental property together you are likely to be deemed to be in partnership and Fred is a related party of your SMSF. If Fred is a member of your SMSF or if Fred is also a relative such as a parent, grandparent, brother, uncle, nephew or same sex spouse he is a related party of your SMSF.

Is the property business real property or residential property?

A property owned by your SMSF which is leased to a related party is an in-house asset.

However, the SMSF can hold in-house assets up to 5% of the market value of the fund’s total assets. When you are dealing with property it is very unlikely the market value of the property will be under the 5% threshold.

There is an exception for business real property. An example of business real property includes a residential building used wholly as a hairdressing salon or a lawyer or accountant’s office, a warehouse, a shop or a cafe. If the property is used 100% in a business the lease will not be an in-house asset.

Your SMSF cannot lease a residential property (not used in a business) to Fred if he is a related party.

Is there a formal lease agreement and are the terms and conditions at market value?

Leasing a SMSF property where the rent is discounted, there is no formal lease in place and rent is paid sporadically or the rent is not paid in accordance with the lease agreement and no action is taken can trigger the NALI provisions.

Generally, the SMSF will fail the sole purpose test if the rent is not at arm’s length.  If you decide to rent a residential property owned by your SMSF to Fred at a 50% discount because he is a good friend, and you know he will mow the lawns and maintain the property the purpose of renting the property to Fred is to benefit your friend and not for the sole purpose of maintaining the fund for the retirement of the members.