Temporary rent relief due to COVID-19 and the effects on SMSFs
Due to the economic stress arising from the COVID-19 pandemic, SMSFs are facing the prospect of tenants falling behind in their rent payments and other lease obligations due to financial hardship.
On the 29th March 2020, Prime Minister Scott Morrison announced that Australian states and territories would put a six-month moratorium on evictions for both residential and commercial tenants during the COVID-19 pandemic.
Currently, the states and territories are still yet to provide details on any arrangements that are proposed to assist landlords and tenants. However, the Australian Taxation Office (ATO) have provided a non-binding practical approach for the 2020 and 2021 financial years in which they announced that they will not carry out compliance actions against any SMSFs that provide tenants with rent relief or reductions due to the financial effects of
Whilst this is positive news, SMSF’s and their trustees/directors must manage this matter carefully to avoid facing the risk of significant penalties under the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’).
If the tenant has no direct or indirect relationship with the trustee of the SMSF (the landlord), the SMSF trustee may be able to grant rent relief to the tenant without contravening the SISA.
If a SMSF seeks to grant rent relief under a lease to a related party tenant, a trustee must demonstrate that they are granting concessions that are consistent with an arm’s length party and it is in the best interest of the fund and its members. These important issues need to be considered including:
The sole purpose test (s. 62 of SISA). Is the trustee merely assisting a related party rather than acting in accordance with what an arm’s length landlord would do?
The in-house asset test (pt. 8 of SISA). The non-payment of rent may give rise to a loan by the SMSF to the related party, and if that loan exceeds 5%, then a contravention may arise under this test.
Lending or providing financial assistance to a member or relative is prohibited under s. 65 of the SISA.
The arm’s length test (s 109 of SISA). All investments and transactions involving an SMSF must be made and maintained on an ongoing basis on an arm’s length terms.
SMSFs with LRBAs –– further implications
If a SMSF has borrowed money under a limited recourse borrowing arrangement (‘LRBA’) to finance the acquisition of a property (whether residential or business real property) a whole range of other implications may arise. Similar to the SISA contraventions raised above, a related party lender must also act at arm’s length.
If a trustee grants rent relief to tenants, the SMSF’s ability to make repayments under the LRBA may easily fall into arrears and into default, which may lead to further ramifications.
Possible consequences of non-arm’s length actions
Contravention of the SISA.
The ATO may determine that any income and net capital gain derived from the property is taxed at the highest marginal rate.
The ATO may apply a range of penalties.
As mentioned above, the federal and state/territory governments are yet to provide details on the proposed assistance to both tenants and landlords due to the COVID-19 pandemic. Further updates, as they occur, will be provided on the TSP Accountants Facebook page and our website.
It is important to minimise the risk of contravention by seeking professional advice before making any decisions. Please contact TSP to find out more about the implications for your SMSF.