SMSF rent relief for related party

   Posted by Admin

The ATO has announced So if your business has a lease agreement with your SMSF for its premises / property being forced to pay market rent at while being impacted by Coronavirus is one less thing for business owners to worry about.

ATO Announces SMSF Rent Relief

The ATO has announced that it will allow SMSFs that have a lease agreement in place with a related-party business tenant to temporarily reduce rent due to the business and economic impact of Coronavirus / COVID-19. ATO will not be taking compliance action for the 2020 and 2021 financial years where an SMSF provide rent relief to a related party business leasing commercial property from the fund.

The following has been provided from the ATO on their website in regards to SMSF Rent Relief COVID-19 Temporarily Reducing Rent:

ATO said, we understand that during the extreme business and economic conditions relating to COVID-19, many businesses would have already stopped paying their SMSF landlord rental under their current lease agreement to help ensure their survival of their business.  This announcement on the ATOs approach to SMSF rent relief is welcomed and provide some minor, but potentially important relief for SMSFs trustees that have a rental agreement in place with a related party business or company.

SMSF Rent Abatement Periods

It will be possible for an SMSF landlord to provide rent relief (such as a rent free period) under their lease agreement provided the SMSF can establish it is in the best interests of the SMSF. The specific adjustments to the rental agreement between the SMSF and the related party business tenant will depend on:

  • the circumstances of each business tenant, including its cash flow, operations and the restrictions imposed by COVID-19
  • the terms of the existing lease
  • the property the subject of the lease, including its location and the ability for it to be leased to another tenant
  • comparative rent relief (and other incentives) being offered by arm’s length landlords.

Because of the seriousness of the SIS Act compliance risks, obtaining sufficient evidence to justify the rent relief (or other incentive) will be vital. It is also essential the new arrangement is properly documented.

It’s extremely important that SMSF trustees document and provide evidence of their decisions to provide their related party business SMSF rent relief as this will be utilised by the independent auditors of the fund to determine whether the SMSF rent relief is appropriate and at arms-length for the situation.

SIS Act compliance issues

The following has been provided by Cooper Grace Ward: SMSF landlords: can you agree to COVID-19 rent relief?

An SMSF that provides rent relief (or other incentives), risks breaching a number of SIS Act compliance provisions, including the following:

  • Sole purpose test – as the reason for offering the rent relief (or other incentive) could be viewed as to assist the tenant, not increasing the retirement benefits of the SMSF members.
  • Financial assistance – as the rent relief (or other incentive) will provide a financial benefit to the member or relative personally (either directly or indirectly) outside the SMSF.
  • Arm’s length dealing – as it could be difficult to establish the SMSF is dealing with the tenant in the same manner as they would an unconnected tenant

A strict interpretation of these rules requires the SMSF to enforce the terms of an existing lease, including taking all necessary steps to collect the full rent payable, potentially down to taking possession or enforcement action. This is the case even if this would have a detrimental impact on the tenant or the members (personally).

Standard provisions in leases regarding the ability to amend the lease term and charging interest on rent shortfalls, will not help the SMSF overcome the potential SIS Act compliance consequences.

If rent relief (or other incentive) is provided without obtaining sufficient evidence or properly documenting the arrangement, there is a high risk of the ATO taking adverse action against the SMSF, such as administrative penalties of up to $12,600 per breach per trustee or non-compliance.

It is critical that rent relief (or other incentive) is not provided by an SMSF without them first obtaining proper advice in relation to the SIS Act compliance consequences.