The ATO has previously stated it will not take compliance action for the 2019–20 and 2020–21 financial years if an SMSF provides rent relief to a tenant.
On 17 April, it updated its guidance, stating that if an SMSF holds an interest in an interposed entity such as a non-geared company or a non-geared unit trust and that interposed entity leases property to a tenant, the ATO said it 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.
However, if there are temporary changes to the terms of the lease agreement in response to COVID-19, the ATO said 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,” the ATO said.
Speaking to SMSF Adviser, DBA Lawyers director Daniel Butler said the ATO should be congratulated for its approach.
However, he added that further clarification is still needed regarding its relief, pointing out that, in relation to a non-geared unit trust, it only covers a deferral of rent, while it discusses waivers when referring to SMSFs elsewhere in the ATO’s guidance.
In addition, Mr Butler said the ATO’s suggestion that required documentation can include a minute could mislead people, as a variation to the lease drafted by a legal practitioner is typically needed.
“There are a range of other issues that not treating this with due care may give rise to, including jeopardising the insurance cover including the loss of rental insurance cover etc.,” he said.
Mr Butler also said that, given the ATO’s prior strict position on contravening a criterion in Regulation 13.22D of the Superannuation Industry (Supervision) Regulations 1994, there should be an aim of getting more comfort on the future years covered by the in-house asset practical relief.
“The temporary relief at the first paragraph only refers to temporary relief for 2019–20 and 2020–21 when non-geared unit trusts and non-geared companies will require indefinite relief, given a criterion in 13.22D may not have been complied with and effectively an SMSF must offload any ‘tainted units’ and can never ever acquire any further units in that unit trust,” Mr Butler said.
“Thus, more comfort and express wording is required.”
I would be interested to know the situation with the reverse. ie: business is closed but related party tenant continues to pay rent as per the lease to super fund or unit trust. Would that income then be deemed non-arms length income?
The SMSF COVID19 FAQ on ato.gov.au clearly states that if you provide temporary relief due to COVID19 – we will not treat the interest in the interposed entity as an in-house asset for the current and future financial years. Importantly the relief must be related to COVID19 impacts.