Hello Lynda
Thanks for the question.
Assuming the commercial lease agreement in place charges market value rent (and not above market value rent) then my expectation would be that the failure for the related party tenant to pay rent should not cause NALI issues (that is, where the fund is earning non-arm’s length/above market value income) to arise.
The failure to pay rent also needs to be considered in the context of how would an arm’s length landlord react if a tenant had failed to pay rent for an entire income year (whatever the underlying reason might be)?
One would assume that ordinarily, an arm’s length landlord would initiate legal proceeds to seek recovery of the unpaid rent and to end the rental agreement.
There is potentially a breach of section 65(1)(b) of the SIS Act – about provision of financial assistance – but only where the tenant is a natural person that is a fund member or their relative.
The biggest risk regarding a breach would be section 109 of the SIS Act, requiring that the trustee of the super fund makes and maintains its investments on an arm’s length basis.
As per section 109(1A), this does not stop the fund from having an arm’s length tenant, but where there is an arm’s length tenant, the trustee needs to deal with them on the same basis as they would an arm’s length tenant.
Assuming the lease is still in place, I would not see the underlying property as representing an in-house asset. However, any unpaid rental amount that is above normal commercial practices, effectively representing financial accommodation to the tenant, could potentially give rise to an in-house asset issue.
Happy to hear the thoughts of other auditors in relation to this matter.
Best regards
The Auditors Institute