The Australian Taxation Office needs to provide greater clarity about its announcement that it will not take compliance action if a self-managed super fund landlord gives a tenant a temporary rent reduction to a related party, a leading SMSF consultant says.
The executive manager of SMSF technical services at SuperConcepts, Mark Ellem, says the ATO needs to state whether there are specific criteria for relief, what sort of rent relief can be provided and what documentation needs to be prepared.
Ellem also says the ATO should clarify whether relief applies only in situations where business real property is owned directly by an SMSF or it also applies where the property is held in a unit trust in which the SMSF invests.
Earlier this month, the ATO announced concessions for SMSFs to enable trustees with property investments to give related party tenants a temporary rent reduction if they are affected by COVID-19. The ATO will not take compliance action this financial year or next if an SMSF landlord gives a tenant who is also a related party a temporary rent reduction.
A common financial planning strategy is for a business owner to set up an SMSF, have the fund buy the business premises and then lease the premises to the business. Business real property is an exception to the rule limiting holdings of in-house assets.
The Government is urging the owners of commercial property to work out arrangements with tenants whose businesses are struggling as a result of the COVID-19 crisis. But for trustees of self-managed super fund that own property the situation is complicated because their tenants are often related parties. Giving a rent holiday to a related party would, under normal circumstances, breach superannuation law.
The ATO says: “Some landlords are giving their tenants a reduction in rent or a waiver because of the financial impacts of COVID-19, and we understand that you 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 a related party a temporary rent reduction during this period.”
Ellem says: “The ATO’s comments appear to only apply to a situation where the property is owned directly by the SMSF. Where the property is held by a non-geared unit trust, it’s not the SMSF that provides the temporary rent reduction, but the trustee of the unit trust.
“The financial effect of the COVID-19 pandemic applies equally to SMSFs owning property directly and those owning indirectly via a unit trust. It would be welcome if the ATO could clarify how the temporary rent reduction would be treated in the latter case.”
Ellem says there are also questions about the treatment of an SMSF using a related party loan to acquire the property.
“Where the loan is from a related party and the safe harbour rules have been utilised to ensure the limited recourse borrowing arrangement (LRBA) is not subject to non-arm’s length income (NALI) rules, any relaxation of loan terms, even if temporary, could result in net income from the LRBA being treated as NALI,” Ellem says.
“Again, it would be welcome if the ATO could advise as to its position in this scenario.”
Ellem says the ATO appears to be taking a broad approach to its compliance relief but trustees would welcome more specifics on documentation requirements and the different forms of rent relief that can be provided.
And he would like some clarity on how SMSF auditors are to approach all this. “It is possible SMSF auditors may still qualify audit reports and lodge auditor contravention reports in cases where the SMSF has provided a temporary rent reduction to a related party tenant.
“We expect the ATO will be taking no action in relation to any report qualifications that relate to a temporary reduction in rent due to the financial effect of the COVID-19 pandemic. However, this may not be the case if it is discovered that the rent reduction was not temporary, included other lease incentives or was not linked to the effects of COVID-19.”