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What Rental Relief Should My SMSF Provide?

Wednesday, 06 May 2020 09:00

SMSF trustees, like many other landlords, have been approached by the tenant of their leased real estate to temporarily vary their rental arrangements because of the impact of COVID-19 on their income.

This paper considers the issues that trustees of SMSFs face in considering whether to grant rental relief, and to what extent, when the commercial property the fund owns is leased to a related party.

Background

The COVID-19 pandemic and subsequent government restrictions imposed on individuals and businesses have caused widespread and substantial reduction in revenue of some of those businesses.

Because of the significant operating restrictions, many tenants are unable to meet their rental obligations.

SMSF as Landlord

When an SMSF owns real estate which is leased to a non-related party, and the trustee is approached for rental relief, any decision of the trustee as to the amount, extent and length of any rental relief will ordinarily be made on a commercial basis.

Failing agreement, the principles set out in the Mandatory Code of Conduct introduced by the National Cabinet provide some provisions for the resolution of a dispute.

Due to the arm’s length nature of the relationship between landlord and tenant, little would need to be done to prove the decision of the SMSF trustee to grant rental relief is commercial.

However, when the tenant is a related party of the SMSF, often a business owned and operated by a director of the SMSF trustee and member of the SMSF, that non-arm’s length relationship can affect the decision making ability of the SMSF trustee, in considering what action it should take in regards to the inability of the tenant to meet its rental obligations.

The overriding caution here is that the related SMSF landlord and tenant cannot merely arrive at a resolution.

Care needs to be taken, not only for any rental relief to appear to be on commercial terms - there needs to be evidence that the arrangement is actually seen to be on commercial terms.

What are Commercial Terms?

A simple question with a rather complicated answer. Maybe even ‘it depends’ will be appropriate.

Whilst there are many and varied landlord/tenant arrangements which could be considered commercial, the application of such arrangements to the SMSF related party scenario needs to be carefully considered.

Referring to the comment above, that the arrangement needs to be seen to be on commercial terms, effectively means that the trustee should obtain information such as:

  • what kind of rental relief is being granted by landlords to arm’s length tenants in the vicinity of the property, which may include:
    • rental deferral for a set period, with the deferred rent either amortised over the remaining term of the lease or treated as an extension to the lease period;
    • a rent abatement (holiday) for a set period of months;
    • a partial rent abatement, with a further amount deferred for a set period of months;
    • a reduction in the monthly rental amount for a set period; or
    • some other commercial arrangement which meets the requirements of the landlord and tenant; and
  • what are the federal and state/territory government mandated minimum requirements?

    In effect, the various relief options which would be applied if the landlord and tenant were dealing on an arm’s length basis or, as a default position, the mandatory code provisions, should be applied in the non-arm’s length scenario facing the SMSF trustee.

Options to ascertain the rental relief being granted by landlords to arm’s length tenants may include:

  • a written advice from a real estate agent or valuer; or
  • verbal advice (with appropriate notes made) from a real estate agent or valuer; or
  • written or verbal advice (with appropriate notes made) from a person sufficiently experienced in the field of commercial rental; or
  • some other means to verify that the related landlord and tenant were acting on a commercial basis in providing rental relief.

Regulatory Position

The ATO has indicated that it will not take ‘compliance action’ where an SMSF trustee landlord provides a related party tenant with rental relief.

Despite that allowance, it is important that the ultimate decision of the SMSF trustee, and the reasons for the amount of relief, are properly documented, not only for the SMSF audit, but also to have available in the event of any future ATO audit of the SMSF.

Bearing in mind that such an ATO audit is likely to be some years in the future, hindsight will be applied in considering the correctness or otherwise of any decision made by the trustee, so proof of the fact that the trustee’s decision was based on properly sourced information may prove to be very important.

The SMSF Auditor

Although the ATO’s ‘no compliance action’ position is welcome, that does not mean there is no ongoing oversight of the SMSF trustee’s compliance with the superannuation legislation.

The SMSF will still need to undergo the annual audit, and the auditor is still required to consider the usual provisions such as whether the in-house asset rules, provision of financial assistance, sole purpose test and similar requirements have been met.

There is no difference there, except for the temporary removal of the requirement for the auditor to lodge a contravention report with the ATO, but that is on the proviso the auditor forms the opinion that the rental relief granted to the related party tenant was on commercial terms.

If the auditor concludes that the terms were not commercial, then the auditor will be required to report the contravention and the ATO’s ‘no compliance action’ undertaking is unlikely to apply.

In other words, it is very important that the trustee has documentation to show that the rental relief provided to the related party tenant was based on comparable evidence of commercial arm’s length arrangements.

Conclusion

Although the federal government has introduced a mandatory code for the provision of rental relief, which has been adopted across states and territories, the very close nature of SMSF landlords and related party tenants means any relief granted, whether in accordance with the mandatory code or on other agreed terms, should be properly considered and documented.

In particular, the arrangement between the parties to provide rental relief should include:

  • a formal request from the tenant to the landlord;
  • resolutions of the trustee, determining the extent of relief to be granted; and
  • confirmation from the landlord to the tenant advising of the rental relief granted.

The Topdocs rental relief package includes the documents, mentioned above, to evidence the trustee deliberations.

Finally, documentary evidence should be retained to prove the SMSF trustee/related party arrangement was based on commercial arrangements being entered into by non-related parties.

Note:

It should be remembered that it is a requirement of superannuation legislation that property leased to a related party:

  • meets the definition of business real property;
  • is leased under a legally enforceable lease agreement; and
  • is leased at a commercial rate of rent.

Topdocs Legal can provide advice in regards to the ability of the landlord to provide rental relief and any variation to the provisions of the lease agreement.

More information

Should you have any queries regarding rental relief in your SMSF, please contact the team at Topdocs on 1300 659 242.

Please note this article is for information purposes only and does not constitute legal advice. Should you have any queries or require more information, please contact the team at Topdocs on 1300 659 242.

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