The Related-Party Property Lease and the Missing Valuation
Kauri Creek Super Fund is a two-member SMSF (Priya and Anand, both in accumulation). In August 2025 it purchased a light-industrial unit in Geelong for $880,000, funded 60% by member contributions and 40% by a limited recourse borrowing arrangement. The tenant since settlement has been Anand's wholly owned plumbing business, which pays $52,000 per annum on a rolling month-to-month basis with no written lease. The trustee's 30 June 2026 financial statements carry the property at $880,000. The only valuation on file is the purchase contract. Priya's brother, a licensed real estate agent who did not act on the purchase, has provided an informal letter opining the unit is 'worth about $900k'. The auditor also notes the fund's cash at year end is $3,100 and the LRBA repayment is current. Total fund assets are $1.42 million.
1. Identify the contraventions and audit risks arising from the tenancy arrangement, and state what evidence the auditor requires before signing.
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Contravention analysis. The tenant is a related party of a member. Section 71 of the SIS Act prohibits a trustee acquiring an asset from a related party, but that prohibition does not extend to leasing fund property to a related party, so the lease itself is not automatically void. The real exposure is section 65 (financial assistance to a member or relative) and the sole-purpose test in section 62. A month-to-month tenancy at $52,000 with no written lease gives Anand's business occupier security and a below-market or unverifiable rent, which can be characterised as assistance to a member. The auditor should test rent against market evidence: comparable industrial rents in the precinct, outgoings treatment, and whether the business has paid consistently.
Arm's-length requirement. Section 109 requires all fund dealings with related parties to be on arm's-length terms. Absence of a written lease is not itself a breach but makes the terms unprovable. The auditor needs a signed lease or at minimum a documented tenancy agreement, rent ledger, bank statements showing receipt, and a market rent assessment.
Valuation. The purchase contract is not sufficient evidence of fair value two years later. The brother's letter is not independent because he is a relative of a member; his opinion is also unsupported. The auditor should obtain an independent valuation by a suitably qualified valuer, or document why the carrying amount is supportable, and consider whether the 30 June 2026 value is materially misstated. If the property is overvalued, the fund's asset backing and the members' benefits are misstated.
LRBA interaction. The loan-to-value ratio and the section 67A/67B compliance should be re-tested against a supportable value. If value falls, the fund may breach the recourse limitation or the LRBA's own covenants.
Before signing. Written lease or documented terms; rent receipts and bank evidence; independent market rent opinion; independent valuation; confirmation the LRBA repayments are from fund cash flow and not member contributions beyond permitted levels; and a management representation on related-party dealings. If these cannot be obtained, the auditor should consider a qualified opinion or an emphasis of matter, and report to the ATO if a contravention is identified.
2. The trustee argues the brother's letter is adequate because he is a licensed agent. How should the auditor respond, and what independence and documentation issues arise?
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Independence of the valuer. Licensing as an agent does not make the brother independent for this purpose. He is a relative of a member, which creates a self-interest and familiarity threat to objectivity. APES 110 and the auditor's own independence requirements mean the auditor cannot rely on a valuation from a party with a close personal relationship to the members. The auditor should explain that independence is a quality of the relationship, not the licence.
Competence and evidence quality. Even an independent agent's informal letter is weak evidence for a $880,000 industrial asset. A defensible valuation would address the property's highest and best use, capitalisation rate, comparable sales, lease terms, and any encumbrances. A one-line opinion is not sufficient appropriate audit evidence under ASA 500.
Auditor's own position. The auditor must not become the valuer. The auditor's role is to evaluate the reasonableness of the trustee's value, not to substitute their own. If the trustee refuses to obtain an independent valuation, the auditor should document the refusal, quantify the potential misstatement, and consider the effect on the audit opinion.
Documentation. Record the request, the trustee's response, the auditor's assessment of the brother's letter, and the reasons for accepting or rejecting it. If the auditor concludes the value is unsupported, the file should show the alternative procedures performed and the conclusion reached.
Reporting. If the matter is material and unresolved, the auditor should consider a qualified opinion and, where a contravention of section 109 or section 65 is identified, report to the ATO. The auditor should also consider whether the trustee's conduct raises a question about the fund's compliance with the sole-purpose test, which may require disclosure to the ATO.