As we all feel the impact of the COVID-19 crisis, we are very fortunate that the Australian government has provided numerous stimulus packages aimed at helping businesses weather this storm. Along with other measures, loan holidays and rental reductions negotiated with banks and landlords will help and provide much needed cash flow. This includes rent relief available for properties that are owned by an SMSF – even those tenanted by related parties.
But what if the landlord is a related party SMSF? How do you negotiate with yourself?
Potential Compliance Issues with Related party SMSF Rent Reduction.
Under the sole purpose test
- Your SMSF is required to be maintained solely for the sole purpose of the provision of retirement benefits.
- Your SMSF must not provide any financial benefit or assistance to the members of the SMSF or any relative.
- Your SMSF can only deal with a rented party on limited circumstances and with strict and severe rules requiring all dealings be treated as if it were with an unrelated third party.
Therefore, a strict compliance viewpoint could argue that any rental reduction would be financial assistance to the related business, noncommercial, and not for the purpose of providing retirement benefits – resulting in significant compliance breaches and severe penalties.
SMSF landlords can provide ‘a temporary rent reduction’ BUT Common Sense Prevails
The ATO announced that SMSF landlords can provide ‘a temporary rent reduction’ to related party tenants with the SMSF having complete discretion of the amount of the rent reduction and the time frame of the reduction.
The ATO confirmed that it will not take any compliance action for the remainder of FY 2020 & FY 2021. However, the exact parameters of the reporting and audit requirement are yet to be established.
This concession applies to rental reduction only and does not apply to any other lease incentives.
Be Practical in SMSF Rent Reduction Application
The ATO’s concession is extremely generous; however, it lacks clarity & therefore could potentially be abused.
SMSF landlords, once factoring in its own requirements: loan repayments, pension requirements, should provide a reasonable rent reduction to Covid-19 affected tenants, including related tenants.
The reduction should be properly documented and the negotiated terms should be consistent with terms provided by third party landlords. This can be achieved by a real estate agent providing evidence of similar reductions in the area.
If you have any questions on this concession or would like your SMSF to give your related party tenant a rental reduction please contact a member of our specialist Walsh SMSF Division.
