My SMSF owns the property, and it’s affected by Covid-19 – What should I do?

Rental Relief for the tenant

The economic impacts of the COVID-19 crisis are causing significant financial distress for many businesses and individuals.

Ordinarily, charging a tenant a price less than market value in an SMSF is usually a breach of superannuation laws. However, the ATO has provided guidance which allows SMSF landlords to provide for a reduction in, or waiver of rent, because of the financial impacts of COVID-19.

For the 2019–20 and 2020–21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.

What do you need to do?

There are some essential things you should ensure are in place when providing a rent reduction to a tenant, especially when this is a related party.

• Ensure the relief only applies to rent.
  • Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives.
• Ensure that the reduction in rent is only temporary.
  • This means it should have an agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.
• The tenant’s financial difficulty is linked to the financial impacts of COVID-19.
  • Any negotiated rent relief will need to be measured against the COVID-19 financial impact suffered by your tenant.
• Precise arrangements which detail the amount of discount, waiver or deferral of the rent.
  • In evidence that the rent relief is reasonable, it would be best practise if it is consistent with an approach taken by an arm’s length landlord.
• Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief satisfies all of the above.
  • This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the lease terms temporarily.
  • Even if you are both the tenant and landlord, the above should all be documented.

What happens if the property is held under an LRBA?

If your SMSF has a related party loan and is impacted due to the economic effects of COVID-19, you may be able to provide your LRBA with relief under an agreed commercial arrangement.

Ordinarily, not paying market interest rates in an SMSF is usually a breach of superannuation laws. However, the ATO has provided guidance which allows SMSFs with an LRBA to negotiate a reduction in or waiver of interest payments because of the financial impacts of COVID-19.

Suppose the repayment relief reflects similar terms to what commercial banks offer for real estate investment loans due to COVID-19. In that case, the ATO will accept the parties are dealing at arm’s length, and the NALI (non-arms length income) provisions do not apply.

Similar to the rental relief considerations, when providing a loan concession, especially to a related party, the SMSF needs to:

• Ensure the relief only applies to the related party loan
  • Any relief offered on the loan can only relate to that loan agreement. The ATO concession does not extend to other loans.
• Ensure that the concessions are temporary.
  • This means it should have an agreed period of time or agreed date where the concessions are reviewed in light of the economic circumstances.
• The financial difficulty faced by the SMSF is linked to the financial impacts of COVID-19.
  • Any negotiated concession must be measured against the COVID-19 financial impact suffered by your SMSF.
• Precise arrangements which detail the amount of discount, waiver or deferral of the concession.
  • In evidence that the concession is reasonable, it would be best practise if it is consistent with an approach taken by an arm’s length loan.
  • For example, terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.
  • It is also expected that there is evidence that interest continues to accrue on loan and that the SMSF trustee will catch up on any outstanding principal and interest repayments as soon as possible.
• Ensure you have proper documentation which allows your independent auditor to be satisfied that the concession satisfies all of the above.
  • This may be a signed minute, renewed loan agreement or anything deemed appropriate to amend the loan terms.
  • The parties to the arrangement must also document the change in terms of the loan agreement and why those terms have changed.
  • Even if you are both the lessor and lessee, the above should all be documented.

These are extraordinary times, and the ATO provides this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19, they should not fall foul of the law.

Kreston Stanley Williamson Team

*Correct as of September 2020

Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.