Up to date as at 8 April 2020
While under normal circumstances, SMSF rentals are required to be at proven market rates, due to the financial effects of the coronavirus pandemic, the ATO has given permission for SMSFs to reduce the rent for the 2019/20 and 2020/21 financial years. This means that SMSFs that own commercial premises leased to a related party have some relief from the impacts of COVID-19. Here’s the ATO’s position: The ATO has confirmed that SMSFs can provide tenants with a temporary rent reduction, including to tenants who are a related party or related trust, and where a member, relative or a member or related party/trust has an underlying economic interest in the tenant.
While this would normally trigger a range of SIS Act compliance breaches, the Tax Office indicated that it won’t be taking compliance action for either the 2020 or 2021 financial years.
This means that an SMSF can provide a temporary rent reduction immediately without fear of the ATO taking adverse action.
A temporary, restricted measure The rent reduction must be temporary and does not apply to any other lease incentives or relief – only the temporary reduction of rent.
The SMSF can determine:
The amount of rent reduction provided
How long to provide the rent reduction for (Note: the no compliance approach taken by the ATO is currently only applicable for FY 2020 and 2021).
Given current business challenges, the ATO’s position is that there is no need for the rent reduction provided to be justified by market evidence. Best practice, however, is that it is consistent with the approach taken by arm’s length landlords.
It is important that this measure is not abused. The purpose of the measure is to provide rent relief to tenants who are suffering the effects of the COVID-19 crisis, and that this rent reduction should be reasonable and measured to the COVID-19 impact suffered by the tenant. Documentation The rent reduction should be properly documented as it is an amendment to lease terms, since it’s likely SMSF auditors will be required to report any reductions.
The measure will alleviate compliance concerns for SMSFs with tenants unable to pay rent and also offers relief for trustees that want to provide their related party a rental abatement for a period of time.
Covid-19 Response This announcement comes as the regulator has allowed individuals early access to their superannuation to alleviate financial stress caused by the coronavirus.
In an update on its website, the ATO said: “Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that [SMSFs] 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 where an SMSF gives a tenant – who is also a related party – a temporary rent reduction during this period.” Want to know more about quality audits? As a trusted and fully compliant Australian owned and operated SMSF audit firm, we would be happy to have a complimentary phone conversation with you to discuss how these measures may impact your SMSF clients. We aim to ensure quality outcomes for your clients and your practice.
