SMSF and business real property and rent-free periods

Hi

Please help me do the right thing.

I'm in the process of purchasing a small office in a commercial building through my SMSF (no loans involved). The super fund will lease the office to a member of the super fund who will use it to carry on a business.

I understand the lease is specifically excluded from being an in-house asset under s 71(1) of SISA because it is "business real property".

I want to ensure that rent and other terms are at market conditions. However, as Council approval is required by the member/tenant before he can carry on his business and build a fitout, is it within market terms for the SMSF to give the member/tenant a rent-free period until he obtains Council approval? (May take 2-3 months for council approval)

Or would this rent-free period be in breach of the general rule that member cannot benefit from the super fund until retirement?

If the member/tenant does not get any rent-free period for the time that it takes to get Council approval, is the rent that he pays to the SMSF deductible to him (even though he is not carrying on a business whilst waiting for council approval)?

I'd be grateful for any input to ensure I do the right thing.

Thanks
gippsi

 

You have asked two general questions:

1. Are rental discounts still on arms-length / commercial terms?
2. Is an expense deductible prior to the business commencing?

In regards to the first question, I believe rental discounts / incentives / rent free periods are quite common in the market - especially at the moment with the over supply of office space and other commercial premises. I know of a company recently that signed a 5 year lease on the provision that 1 of the 5 years would be rent free.

Maybe someone else could comment or confirm whether it is a typically situation?

In regards to your second question, expenses incurred before the commencement of a business are typically not deductible under the general deduction provisions because there is no direct connection or nexus between the expense and income earning activity.

However such costs maybe able to be capitalised and written off over a five year period if there is a reasonable expectation an income related activity will be commenced (or if is commenced). A normal example of this is the costs involved in setting up a company.

Lease of commercial premises is excluded from the in-house asset rules.

Even though an SMSF may not have to borrow, in some cases a conservative level of borrowing may be a good idea to provide some leverage and also enable some liquidity and diversification into other asset classes.

SM

 

Thanks, Superman. That was really helpful.

gippsi