The unfolding health, economic and financial crises triggered by Coronavirus (COVID-19) has resulted in increased levels of unemployment and widespread income reduction, a phenomenon which has prompted many tenants to seek assistance from landlords.
This assistance usually comes in the form of rental relief or deferrals, and has given rise to questions regarding self-managed superannuation fund (SMSF) compliance in the case of property owned by an SMSF.
We have provided information below for situations that may exist.
SMSF landlord and related party tenant
Where there is an SMSF landlord and an unrelated tenant, it is reasonable to assume that they are dealing with each other at arm’s length in relation to any rental relief or deferrals. However, the same cannot be said for a situation in which business real property is leased by an SMSF to a related party tenant. In this instance, how does one show that the relief granted is similar to that which would have been given to the unrelated tenant?
The Australian Taxation Office (ATO) states the following:
“Some landlords are giving their tenants rent relief as a rent reduction, waiver or deferral because of the financial effects of COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action if an SMSF gives a tenant – even one who is also a related party – a temporary rent reduction, waiver or deferral because of the financial effects of COVID-19 during this period.
If there are temporary changes to the terms of the lease agreement in response to COVID-19, it is important that the parties to the agreement document the changes and the reasons for the change. You can do this with a minute or a renewed lease agreement or other contemporaneous document.”
It is clear that the ATO is not taking a position one way or another as to whether the rent reduction, waiver or deferral is commercial, justifiable, or at arm’s length. They are giving a blanket undertaking to “look the other way” for the current and the next financial year where this occurs. However, they recommend that you document the changes and the reasons for it.
Property held via interposed unit trust or company
The ATO has adopted a similar approach for property held by an interposed entity, stating the following:
“If your SMSF holds an interest in an interposed entity such as a non-geared company or unit trust and that interposed entity leases property to a tenant, we will not treat the investment in the interposed entity as an in-house asset for the current and future financial years as a result of a deferral of rent being provided to the tenant due to the financial effects of COVID-19.”
Related party limited recourse borrowing arrangement (LRBA) relief
Where a related party has advanced money to an SMSF under a complying LRBA structure to acquire real estate, the ATO is allowing the parties to effectively mimic the relief available in the broader market.
The ATO states:
“We understand that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a related party due to the financial effects of COVID-19.
If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, we will accept the parties are dealing at arm’s length and the NALI provisions do not apply. For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.
The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will catch up any outstanding principal and interest repayments as soon as possible.
Any further repayment relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time.”
Again, the ATO recommends that any changes and the reasons for doing so are documented appropriately. More information on LRBA relief for a related party can be found here.
If you find yourself in any of the above situations and would appreciate assistance and guidance, please get in touch.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the insurance objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.