ATO assistance for SMSFs through COVID-19
27 April 2020
Whilst the ATO and the Government have released measures as part of their response to the COVID-19 which was initially aimed at businesses and individuals, there is some relief for SMSFs.
Reduction in the minimum pension drawdown
As part of this economic response to the coronavirus, the Government announced in their early actions the temporary reduction to the minimum pension drawdown for account-based pensions, transition to retirement pensions (TRIS), allocated pensions and market-linked pensions. Not included are defined benefit pensions such as lifetime or fixed term complying pension products.
This will see a 50% reduction to the minimum pension drawdown requirement for 2019-20 and 2020-21 financial years.
The measure will benefit retirees by reducing the need of potentially having to sell investments to fund their minimum drawdown requirements, due to many retirees losing a significant portion of their super balance as share markets plunged due to this current COVIS-19 crisis.
Temporary rental relief
One of the great benefits of SMSFs is the ability to acquire business real property and enter into an arm’s length lease agreement between SMSF and related party.
If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This even is the case when the tenant is a related party.
Ordinarily, charging a tenant a price that is less than market value in an SMSF is usually a breach of superannuation laws.
However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in or waiver of rent because of the financial impacts of the COVID-19.
For the 2019-20 and 2020-21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.
If this occurs however it is crucial that documentation is put into place to ensure compliance is met, such as:
- Ensure the relief only applies to rent and that the reduction in rent is only temporary.
- The financial difficulty faced by the tenant is linked to the financial impacts of COVID-19
- Clear arrangements which detail the amount of discount, waiver or deferral of the rent relief is reasonable and consistent with an approach taken by an arm’s length landlord.
- Ensure the trustees of the SMSF has proper documentation which allows the auditor of the fund to be satisfied that the temporary rent relief satisfies all of the above; this may be in a form of a minute, renewed updated lease agreement to reflect the temporary change in rental terms between landlord and tenant
- Even if you are both the tenant and landlord, the above should all be documented
LRBA repayments
As the banks are offering loan repayment concessions to businesses, individuals and LRBA SMSF arrangements are also been considered.
In relation to also providing concessions for SMSF related Party LRBA’s, you may be able to provide your LRBA with relief under an agreed commercial arrangement.
Ordinarily, not paying market interest rates in an SMSF is usually a breach of superannuation laws. However, the ATO have provide guidance which allows SMSF’s with an LRBA to negotiate a reduction in or waiver of interest payments because of the financial impacts of the COVID-19.
If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, the ATO will accept the parties are dealing at arm’s length.
But there are some important things you should ensure are in place when you are providing a loan (LRBA) concession, especially when this is a related party.
- Ensure the relief only applies to the related party loan
- Ensure that the concessions are temporary; this means it should have an agreed period of time or agreed date where the loan concessions are reviewed in light of the economic circumstances
- The financial difficulty faced by the SMSF is linked to the financial impacts of COVID-19
- Clear arrangements which detail the amount of discount, waiver or deferral of the loan concession with proper documentation which allows the auditor to be satisfied that the concession satisfies all of the above.
These are extraordinary times and the ATO is providing this guidance in temporary rental reduction and LRBA repayment guidance to allow SMSF trustees to be flexible and agile. If trustees act in good faith in implementing a reasonable and measured reduction because of the impacts of COVID-19 they should not fall foul of the law.
If you need assistance in any of these matters or discussion around whether this is the right action for you and your specific circumstances, please speak to your Business Advisor at our office on 1300 204 781.
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