Can I prepay rent in advance in a Lease?
Yes, you can prepay rent. A Legal Consolidated Commercial Lease is specifically engineered with the express power to do so.
Our law firm’s Commercial Lease allows a tenant to pay rent in advance. This special feature is designed for all business structures. It works whether the landlord or tenant is a company, a family trust, a unit trust or a Self-Managed Superannuation Fund (SMSF). You build a lease on our law firm’s website that gives you this unique power.
An express rent prepayment clause is critical for ensuring your lease is compliant under ATO scrutiny.
Why pay rent in advance?
Your accountant often advises you to prepay expenses before 30 June. This is a powerful tax planning strategy. It increases your deductions and reduces your taxable income for the financial year.
Speak to your accountant about the value of prepaying rent for your specific circumstances. Our lease provides the legal framework to act on that advice with confidence and certainty.
Does the SMSF lease expressly allow rent to be paid in advance?
While our Self-Managed Superannuation (SMSF) Commercial Lease expressly allows the SMSF landlord to accept early payment of rent, should you do so?
An SMSF faces scrutiny from both the SMSF Auditor and the Australian Taxation Office. All dealings, including rent payments, must be on a strict ‘arm’s length’ basis, as required by the Superannuation Industry (Supervision) Act 1993.
The delicate balance requires that your SMSF neither give nor receive an advantage to a related party.
A prepayment arrangement must not give a related party an advantage. An advantage triggers the Non-Arm’s Length Income (NALI) rules. Under section 295-550 of the Income Tax Assessment Act 1997, this results in a devastating 45% tax on your fund’s rental income and capital gains.
Our SMSF Commercial Lease is drafted by superannuation lawyers to meet these complex rules. We build in the specific clauses your SMSF auditor requires to protect your retirement savings from the NALI tax trap. Check with your accountant that the pre-payment is commercially fair and realistic in the current open market.
Our exclusive feature: amend your lease by email
Business conditions change constantly. Our commercial lease is designed for this reality. We build a unique ‘waiver and variation’ clause into every lease.
This powerful feature, found in all Legal Consolidated leases, allows you and the other party to amend the lease terms with a simple exchange of emails. This gives you the flexibility to formalise arrangements like a rent prepayment schedule without extra cost or delay.
This allows you to quickly adapt if there is a change to company, superannuation or trust law.
Build your asset protection fortress using a Family Trust as the tenant
If your Commercial Lease is silent on prepaying rent, an advance payment is a red flag for the ATO. During a desktop audit, this can be treated as a loan under Division 7A for a company, creating a tax disaster.
For a Self-Managed Super Fund, it falls foul of the ‘arm’s length’ rules, triggering the 45% NALI tax. To withstand ATO scrutiny, your lease must include a specific clause that expressly permits the prepayment of rent.
A compliant lease is one part of a complete asset protection strategy. Your entire business and investment structure must be robust and seamlessly integrated.
The ultimate structure separates your high-risk business from your valuable assets. An SMSF owns the commercial property. It then leases the property to your business, which operates from a Family Trust. This shields the property from any business creditors, lawsuits or failure.
Build your complete asset protection fortress on our law firm’s website. This requires a suite of integrated documents:
- Company as Trustee of a Family Trust: Build the correct corporate structure for asset protection and control.
- Service Trust Agreement: Legally move income from your high-risk business to a low-risk entity, protecting your profits from attack.
- 3-Generation Testamentary Trust Wills: Your asset protection must outlive you. A non-tax effective Will leaves your life’s work exposed to your beneficiaries’ creditors, bankruptcy and divorce. Secure your legacy for your children and grandchildren. Build a 3-Generation Testamentary Trust Will. It provides the ultimate asset protection and tax reduction strategies for your family.