Rent Relief for SMSFs

Rent Relief for SMSF’s

Lockdowns caused by COVID-19 have had a severe impact on many businesses right around Australia. 

A loss of business revenue has meant many have been unable to meet the rental obligations in place at the onset of the pandemic.  In response to this issue, the Commonwealth and State Governments have released various measures including a mandatory code of conduct, to assist landlords and tenants in reaching an agreement on how rent is determined during this time.

The ATO's position

Where a commercially rented property is held by an SMSF, granting rent relief may put the SMSF at risk of breaching provisions of the SIS Act or the SIS Regulations, particularly if the property is leased to a related party of the SMSF.  In response to this risk, the ATO provided guidance on rental relief (refer to SMSF Frequently Asked Questions) which stated the ATO will not take compliance action for the 2019-20 and 2020-21 financial years where the SMSF gives a tenant – even if they are a related party – rental relief due to the impact of COVID-19 on the tenant.

Whilst the ATO will not take any action against the SMSF, auditors are still required to form an opinion on whether the relief represents a commercial or arm’s length dealing; this means auditors may still qualify their audit report and lodge an auditor contravention report where they consider there has been a compliance breach.  The key message here is that the ATO's guidance does not mean all SMSF's have a free pass to provide rent relief to their related party tenants; any rent relief so provided must be given on commercial terms. 

Within a recently released addendum to the auditor contravention reporting instructions, auditors have been provided with guidelines on how to approach the impact COVID-19 may have had on an SMSF for both the 2019-20 and 2020-21 financial years.  The instructions detail three requirements that would indicate rental relief has been provided on an arm's length basis:

1. The rent relief offered by the trustee is on commercial terms;
2. The rent relief was offered as a result of the impact of COVID-19; and
3. Appropriate documentation has been put in place reflecting the rental relief arrangement.

When auditors conclude the three requirements above have been satisfied, the ATO states auditors are not required to report on any potential breaches which arose as a result of providing a related party tenant a rent reduction, waiver or deferral.

Our approach

We understand it is important that our position, expectations and requirements in relation to rent relief for our audits for the year ended 30 June 2020 are clear to our clients.    

For completeness we should note that for residential properties, and commercial properties rented to unrelated tenants, there is an assumption that rent relief will be dealt with on an arm’s length basis unless we have evidence to the contrary.  Therefore our focus is on commercial properties rented to related parties.

For SMSF’s with commercial properties leased to a related party, it is expected that landlords and tenants will default to the National Cabinet Mandatory Code of Conduct in the first instance.  A few of the principals described within the code of conduct include:

• Total rent reduction (rent waiver plus rent reduction) up to 100% of the ordinary rent payable
• Rent waiver must constitute no less than 50% of total reduction
• Rent deferrals to be amortised over the balance of lease term and for a period of no less than 24 months
• Landlord to waive recovery of expenses or outgoings payable by the tenant
• Landlord to freeze rent increases for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period  

We note that the code and its principles is implemented and regulated by each state or territory so it is important the requirements of the relevant state or territory are referenced when determining the relief.  

As the mandatory code sets guidelines for an appropriate commercial outcome between unrelated parties where COVID-19 has impacted the tenant, should SMSF trustees not follow the principals of the code but instead provide relief to their related party tenant which is more favourable to the tenant than the code, they need to be able to explain why they have made this decision and why it remains an arm's length arrangement.

What we require

After considering the above, to satisfy ourselves that the rental relief offered to the related party has satisfied the ATO's three requirements, we require the following information be provided to us during the audit:

1. Written request for rental relief from the tenant outlining the impact COVID-19 has had on their business;
2. Confirmation of the tenant's eligibility for JobKeeper (where applicable);
3. Evidence to show reference has been given to the National Cabinet Mandatory Code of Conduct and applicable state codes in determining the relief;
4. Minute or resolution from trustee documenting request from tenant, consideration and conclusion of relief (Documentation should include the reasons for the change to the terms of the lease agreement); and
5. Signed confirmation of the new terms and agreement by both parties

The above information is required for all direct properties and Division 13.A entities where the tenant is related.

Reporting in the Financial Statements

For all rent relief scenarios where there is a deferral of rent, it is best practice that the rent deferred should be recognised as a receivable in the Statement of Financial Position; though it should not be included as taxable income in the SMSF's Annual Return.  In addition, the Notes to the Financial Statements should be reviewed to ensure they reflect that deferred rental income will be accrued as a receivable.

As always, we encourage you to contact us with any queries or comments you may have regarding this or any other audit issue.

Call Baumgartner Super on 1300 04 SMSF or contact us for a competitive, obligation-free quote.