Hello Joanna
Thanks for the question.
I have seen both approaches (partnership financials/return and no partnership financials/no partnership return) where an SMSF is in a tax law partnership, often with a related party (individual or discretionary trust) in relation to an investment in real estate.
Where the only income from a tax law partnership is rental income, I understand that the ATO does not consider it mandatory for the tax law partnership to lodge a partnership return.
That is, the partners can included their proportionate share of the rental income in the fund return at item 10 Label B (rental income) rather than at Item 10, Label I, gross distributions from partnerships.
If financials are not provided for the tax law partnership, obviously we still need adequate records to test the income and associated expenses.
Happy to hear the views of other auditors in relation to this matter.
Best regards
The Auditors Institute