Senior SMSF Technical Specialist
The announcement by the ATO to extend COVID-19 relief to SMSF trustees due to the financial impact of COVID-19 has been a welcome move.Join our newsletter
A key relief measure which continues to be in play is the ability for an SMSF trustee to provide rent relief to a tenant (including a related party). This could be in the form of a reduction in rent, a rent waiver or a deferral. The ATO have indicated they will not take any compliance action provide the rent relief agreed to is on a commercial basis and has been properly documented.
Trustees will need to be able to demonstrate that any concessions agreed to are on arm’s length terms. This includes having regard for any State or Territory COVID-19 support measures in place. If support measures have not been legislated in the relevant State or Territory, it will be appropriate to first obtain specific other evidence (such as a valuation) to support that a particular arrangement is commercial.
If trustees are not able to demonstrate the arrangement is on a commercial basis, the fund will risk breaching a number of SIS provisions including the arm’s length rules, sole purpose test, prohibition on providing financial assistance to members or relatives and in-house asset rules (a rent deferral could amount to a loan to the tenant).
Other documentation that is appropriate includes:
- requiring the tenant to make a written request for a variation of the lease terms due to the adverse economic effects of COVID-19,
- trustee resolution agreeing to relief to be provided (which aligns with relevant state based regulations or other evidence obtained) and why, and
- trustee formally advising the tenant of the agreed variations.
A similar concession has also been extended in situations where rental relief is being provided by a related non-geared company or unit trust, which the SMSF is an investor of.
The ATO is still to make a legislative instrument so that any rent deferrals offered by the fund or a related non-geared company or unit trust is excluded from being an in-house asset of the fund in the current or future financial years. In the meantime, the ATO will rely on their announced compliance approach [QC 66859].
Loan repayment relief
The ATO has continued to offer similar compliance concessions for related party loans as they have for related party lease arrangements. Importantly, if the fund agrees to offer loan relief to a borrower, it must be on commercial terms (ie the terms that a third party lender would offer to borrowers in the same situation with loans that have the same terms and conditions).
Importantly, relief must only be offered if the difficulties in paying are a consequence of COVID-19 (and not for another reason eg business was already struggling prior to COVID-19). Similarly, relief should not continue if the business has subsequently recovered.
If a fund has a limited recourse arrangement in place, the trustees may be able to accept loan repayment relief from a related party. A key requirement is that relief is required due to the financial impacts of COVID-19. Any relief offered again would need to be on commercial terms (having regard for what commercial lenders would be prepared to offer) and retaining evidence to demonstrate this. Any changes to the loan agreement would also need to be documented.
In-house asset relief
Funds with in-house assets in excess of 5% at 30 June 2021 still need to make a written plan as to how they will reduce the market value of the fund’s in-house asset to below 5% by 30 June 2022. However, the ATO have indicated they will not take compliance action if:
- the fund is not able to implement the plan by 30 June 2022 due to the market not having recovered in some areas, or
- it is unnecessary to implement the plan (eg if the market has recovered causing the fund’s in-house asset level to fall under 5%).
SMSF Residency relief
Finally, the ATO have acknowledged that trustees or directors who have been stranded overseas due to COVID-19 may encounter issues with satisfying the residency requirements for a super fund.
One of the requirements of being an Australian super fund is that central management and control of the fund is ordinarily in Australia. Whilst the law contemplates that trustees or directors are still able to meet the central management and control test, despite being absent from Australia, it is on the basis that the individual intends their absence to be temporary.
Being absent from Australia for a period of more than two years, is not in itself, an automatic indication an individual no longer intends to be temporarily absent from Australia. However, the ATO have indicated they will not commit compliance resources to determine whether a fund meets the residency test if COVID-19 has caused an individual to be absent for a period of more than two years, provided there have been no other changes in the SMSF and individual’s circumstances affecting the other residency conditions.
As part of extending COVID-19 relief concessions to 2021/22, the ATO have also extended the reporting obligation relief in respect of the Auditor Contravention Report (ACR). Auditors will still need to check that any rent or loan repayment relief is offered on commercial terms and the arrangement appropriately documented. If there is insufficient evidence to support this, auditors should notify the ATO via the ACR.
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