Speaking in a webinar hosted by actuarial certificate provider Accurium, Mr Ellem stated that the ATO is providing SMSF trustees with compliance relief in relation to some of the SIS Act implications that can arise from a reduction in rent.

“The ATO will provide relief from compliance action provided the [rent] relief is temporary and that it is due to the financial effects of COVID-19, so that it was reasonable to give the related party that relief, and that it is on commercial grounds,” Mr Ellem explained.

“[In order to do that], we either need to apply the Mandatory Code of Conduct for commercial leases or provide other third-party evidence that the relief provided is commercial.”

It also is important that changes to the lease are properly documented, he noted.

“We also need to ensure that the lease is current. There needs to be a lease agreement in place in relation to the lease of the business real property from the SMSF as the landlord to the related party.”

Under the definition of in-house assets in section 71 of the SIS Act, Mr Ellem explained that a lease of real business property by an SMSF to a related party is not an in-house asset provided, among a few other things, that the lease agreement is enforceable by legal proceedings.

“[That means], if our lease agreement has expired and hasn’t been renewed, then there could be an issue with whether that lease agreement is enforceable by legal proceedings,” he warned.

“During the annual check, it’s very important to ensure that the lease agreement is current and that it is being paid in accordance with the lease agreement. I’ve seen a number of occasions where at the start of the lease for the business real property to the related-party business, everything is done correctly, the lease is drafted with the relevant terms, but then it gets filed away and forgotten about, until it’s pointed out by the SMSF auditor.

“The SMSF auditor [then points out] that the lease has expired some time ago, or perhaps the the rent is not being paid in accordance with the terms of the lease, in that when it got to the end of a particular period, it was meant to be indexed to CPI and it hasn’t been indexed.”

Mr Ellem said it is therefore prudent to review these leases, and not just because of COVID-19, to ensure that they are current and that the terms of the lease agreement have been followed.

“It should be raised on an annual basis when annual accounts are looked at and before everything is handed over the SMSF auditor for the annual audit,” he stressed.