The In-House Asset and the Sole-Purpose Test
The Dunmore Super Fund has three members: Sam, Tessa and Ravi. The fund's assets are $2.4 million, of which $1.1 million is a residential property in Byron Bay rented to Sam's adult daughter at $450 per week, well below the $750 market rent. The fund also holds $600,000 in listed shares and $700,000 in cash. The trustee has not obtained a written lease. The property was purchased in 2021 with a limited recourse borrowing arrangement that is now repaid. The fund's 2026 financial statements show rental income of $23,400 and no impairment. The auditor notes that the daughter has been in arrears twice and that the trustee has not pursued the arrears. The fund's trust deed permits investment in residential property.
1. Analyse the compliance issues arising from the residential property and the tenancy.
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Sole-purpose test. Section 62 requires the fund to be maintained solely for the purpose of providing benefits to members in retirement. Renting residential property to a member's daughter at below market rent is a use of fund assets to provide a benefit to a relative of a member. That is a potential breach of the sole-purpose test and may also be financial assistance under section 65.
Arm's-length dealing. Section 109 requires dealings with related parties to be on arm's-length terms. The rent of $450 against a market rent of $750 is a discount of $300 per week, or $15,600 per year. That is a benefit to the daughter and a detriment to the fund. The absence of a written lease makes the terms unprovable and increases the risk.
Residential property restrictions. The fund may hold residential property, but the property must not be acquired from a related party and must not be used by members or relatives. The trust deed permits the investment, but the SIS Act restrictions still apply. The auditor should confirm the property was not acquired from a related party.
Arrears. The trustee has not pursued arrears. That is a further indication that the fund is not being administered on arm's-length terms and may be a breach of the trustee's duties.
Financial statements. The rental income of $23,400 reflects the discounted rent. The auditor should consider whether the property is impaired and whether the financial statements should disclose the related-party transaction.
Conclusion. There are likely breaches of sections 62, 65 and 109. The auditor should obtain the lease, rent records, and evidence of the market rent, and should consider reporting to the ATO.
2. What should the auditor do before signing, and what are the reporting options?
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Before signing.
- Obtain the lease: request a written lease or documented tenancy terms.
- Market rent evidence: obtain an independent rental appraisal for the Byron Bay property.
- Arrears: obtain the rent ledger and evidence of the trustee's response to the arrears.
- Related-party disclosure: confirm the financial statements disclose the related-party transaction and the terms.
- Impairment: assess whether the property's carrying amount is supportable given the discounted rent and arrears.
- Trust deed: confirm the investment is permitted and that the property was not acquired from a related party.
Reporting options. If the auditor identifies a contravention, the auditor should report to the trustee in writing and consider reporting to the ATO. The auditor should also consider whether the financial statements are materially misstated and whether a qualified opinion is required. If the trustee refuses to address the matter, the auditor should consider an adverse opinion or resignation.
Documentation. The file should record the evidence obtained, the trustee's response, the auditor's conclusion, and the reporting decision. The auditor should also document the consideration of the sole-purpose test and the arm's-length requirement.
Member communication. The auditor should consider whether the trustee needs to inform members of the related-party arrangement and the potential contraventions. The auditor's report is provided to the trustee, and the trustee is responsible for communicating with members.