Getting the value out of property in an SMSF
An Airbnb property can represent a valuable asset to an SMSF, but don’t expect to get the same returns if the property changes use and is rented out to a related party, says an expert auditor.
Shelley Banton, head of education at ASF Audits, said valuation of real estate assets and rent is a complex and challenging aspect of auditing an SMSF.
With the rise of Airbnbs, it can pose a lot of questions if the property use is changed and whether it can be rented out at the same rate – such as where an Airbnb is now used as a business real property.
“[The question is] is that market value?” she said.
“I would argue no, because Airbnb clients pay a premium to rent a fully furnished property for a small period of time.
“They also don’t pay additional expenses, such as electricity, gas, or internet. So, if the property is changing use, a new market value of rent would need to be done.
“Alternatively, it could be rented through an independent property agent, which might indicate it’s at arm’s length as long as all the accompanying documentation is provided.”
Ms Banton said rental valuation is not just an issue for Airbnbs, but for any property that is leased to a related party.
“Sometimes, this issue gets left behind when we focus on property and unlisted entities in SMSFs because if we accept that the property is leased through an unrelated licensed real estate agent, and it’s on commercial terms, we assume there can be very little risk.
“However, it is best practice to have a copy of the lease agreement between the agency and the unrelated tenant on file.”
One of the most common questions posed by SMSFs in relation to trustees leasing a business real property to a related party deals with rental valuation and what occurs if the rent is raised higher than the lease agreement halfway through an agreed period.
“Do they have to break the lease and start a new one to reflect the higher rent? Well, in my world, the answer’s no because that’s not on commercial terms,” she said.
“An unrelated party can’t break the lease to increase rent and it doesn’t apply to related parties either.
“But you need to be aware that when the lease expires, you should expect to have to obtain another market rental appraisal because the previous one will be out of date.
“The second situation is where the property is leased to a related party and the rent doesn’t agree to the rental valuation because the rent has been adjusted for property improvements,” she said.
Ms Banton said there should be clause in a lease agreement that recognises the capital improvements that may have been made by a tenant which should be on commercial terms.
And while there might be a time period of free rent made available, it shouldn’t be for the entire term of the lease.
“Questions arise about whether the improvements are reasonable and whether the fund should pay for some of them, or should they be taken up as a contribution,” she said.
“We need to look at all the facts and circumstances as well as have a look at the invoices.”
“Being able to prove the improvements have been done on commercial terms will make all the difference.”