We are seeing first hand the devastating effects from the coronavirus pandemic and its impact on business generally. Whilst some have thrived (e.g. think supermarkets), many have closed their doors due to Government intervention to stop the spread of this virus. This has resulted in many businesses, not only standing down staff but also wondering where the money is coming from to pay the rent.
Since the Government’s Economic Response package being released, many questions have been asked about the impacts of tenants not being able to make rental repayments to an SMSF as landlord. Furthermore, what would happen in the event that the tenant is in fact a related party to the SMSF? This question was posed to the ATO almost immediately following the Government announcement, with stakeholder meetings on Friday to discuss further.
So, it is great news to see the Australian Taxation Office (ATO) promptly respond via their COVID-19 web page to offer relief for trustees that want to provide their related party a rental abatement for a period of time. Essentially, the ATO will not provide any compliance resources towards such an arrangement where the tenant has been impacted by the financial impacts of COVID-19 for the 2019-20 and 2020-21 financial years.
Temporarily reducing rent
One of the great attractions of SMSFs is the ability to acquire business real property (BRP) and enter into an arm’s length lease agreement between the fund and a related party (e.g. member). There are however a number of important requirements that must continue to be met to ensure that a fund does not breach any of the SIS laws by charging a related party a price that is less than market value. These include:
- Sole purpose test (s.62, SISA) – current assistance perceived
- Financial assistance to members (s.65, SISA)
- Arm’s length dealings (s.109, SISA)
Typically, the trustees of the SMSF would be required to enforce the terms of an existing lease, which in the current environment could have ultimately led to taking possession or other enforcement action. This ATO relief was therefore critical for many funds to be able to overcome some of these potential compliance issues.
How the SMSF and the related party tenant may ultimately comes to terms for the rental abatement will need to be determined by the parties. This could include a:
- rental waiver;
- reduction in rental payments; or
- rental deferral
Some instances may exist where it might be in the interests of the parties involved to terminate the lease, whether this is done via a ‘force majeure’ clause or ultimately agreed to between the parties, acting in the best interests of the fund members.
Whatever the case, documenting these decisions between the fund trustees and the tenant is going to be crucial.
What we’re doing to help…
Now that the ATO has formalised its position on providing temporary rent relief, Smarter SMSF will shortly be releasing a new set of documents to evidence this decision between the SMSF and tenant to provide a period of temporary rental relief.
More information on this will be provided in the coming days.