ATO issues guidelines for SMSF trustees granting rent relief during COVID-19

Are you a member of a self managed superannuation fund (SMSF)?

Does your investment strategy includes ownership of a commercial property? 

Is your business run out of the property, and you pay rent to the SMSF trustee?

If you answer yes to these questions then this article is for you.

According to the Australian Taxation Office (ATO), there are currently almost 600,000 self managed superannuation funds (SMSFs) nation-wide, owning over $70 billion worth of non-residential property among them.

Given the strict regulation of SMSFs, many of  our clients have been wondering whether they are permitted to grant rent relief to their tenants in the context of the economic difficulties we’re seeing arising in the COVID-19 environment.

Thankfully, the ATO has now provided some guidance on this issue.

Rent relief where landlord is an SMSF

As you would likely be aware from media coverage, many tenants are approaching their landlords seeking rent relief to help them deal with the increasing economic impact COVID-19 is having on their income. 

It has been unclear whether SMSF landlords would be breaching their obligations under the Superannuation Industry (Supervision) Act 1993 (SIS Act) by granting such a request.  On the face of the legislation, it is likely that such action would render a SMSF non-compliant. 

However, guidelines just released by the ATO provide assistance for SMSF landlords who are considering offering rent relief to its related party tenant, allowing this to be done without risking non-compliance with the landlord’s SIS Act obligations.  

The ATO guidelines (available here) confirm that for the 2019-20 and 2020-21 financial years, that no action will be taken if the SMSF trustee offers “a temporary rent reduction” to a related party tenant.  It appears that so long as the rent reduction is temporary in nature, SMSFs are free to determine the amount of rent reduction and the rent reduction period amd market evidence is not required to support those numbers.  However, it’s important to note that the current ATO concession does not apply to other lease incentives or relief which are not a ‘temporary rent reduction’.

The guidelines make no distinction between commercial and residential leases – it appears that both are within the scope of the ATO concession.

Maintaining SIS Act compliance

In considering whether rent relief should be granted, the significance of non-compliance with SIS Act obligations should not be underestimated. 

Substantial monetary penalties can be imposed by the ATO on the SMSF trustee for non-compliance with requirements of the fund to deal at arm’s length (as if with an unrelated third party) and to meet sole purpose test (to increase a member’s retirement benefit).  

It is important that all reasons and arrangements are properly documented and as such, we recommend that SMSF trustees to consider seeking expert advice on each individual lease, property and tenant circumstances.

What does this mean for you?

If you are considering whether rent relief is appropriate in your SMSF arrangements, please get in touch with our team for further information or guidance. Senior Lawyer, Kate Drummond and Associate, Rowdy Johnson can be contacted on (03) 9843 0402.