In these uncertain and difficult times due to the impact of the Coronavirus, it was fantastic to be able to gain key insights today from the Australian Taxation Office (ATO) and SMSF Association relating to a variety of measures that needed clarification for the SMSF sector to engage with and resolve a range of key issues with trustees.
The ATO sees stakeholder engagement as critical to raising issues to allow for a timely response to the most topical issues impacting the SMSF sector.
In this blog post, I wanted to share some how the ATO is responding to many of these issues as outlined by Assistant Commissioner – SMSF Segment, Dana Fleming in her conversation with John Maroney, CEO of the SMSF Association.
Temporary rental relief
As indicated in our recent two blog posts:
the ATO has indicated that they will not apply compliance resources to the 2019-20 and 2020-21 financial years where the SMSF provides a rent reduction to a related party tenant.
In addition to the Q&A provided on the ATO website, Dana made some important reminders to ensure that:
- Trustees document the change and the reasons why they have made that change; and
- Trustees look to update the lease agreement at an appropriate time that can reflect the changing a terms as a formal record of the agreement between the Lessee and Lessor
What we are doing to help:
Smarter SMSF is now has available temporary rental relief documents that you can order to support trustees that need to comply with this guidance provided by the ATO. It is available to order via one of the subscription packages or alternatively can be ordered for $220 (incl. GST) on the Smarter SMSF platform.
Another key issue that required clarity from the ATO was addressing the potential In-House Asset (IHA) issues as a result of the significant fall in financial markets. You can refer to our recent blog post, for further information on this topic,
The key message for any funds with a potential IHA problem is that:
- Trustees must take the necessary steps to ensure written rectification plan is in place by 30 June 2021 (which may not have to be acted upon if markets recover); and
- the ATO reassures trustees that where best endeavours occur to try and remedy the breach outlined in the written plan can’t occur due to liquidity issues and/or markets not having recovered during 2020-21, they will not apply compliance resources where the amount remains above the 5% threshold.
What we are doing to help:
Smarter SMSF is currently prepared documents to support how trustees in putting together a plan to rectify an IHA breach due to the changing in financial markets. You can contact us on firstname.lastname@example.org if you would like to receive an email once these documents are available.
Related LRBA repayments
With the banks now offering concessions to individuals and businesses who are struggling to meet loan repayments, the next natural question to ask is whether any similar concession would apply for SMSFs with loan in place using a limited recourse borrowing arrangement (LRBA). In particular, where a similar concession is applied to an SMSF, it could suggest that a breach would apply, in particular when thinking about the operation of the non-arm’s length income (NALI) provisions within section 295-550 of the ITAA 1997.
The ATO recognises this as a key issue, in both a bank and related party loan environment (e.g. where the SMSF follows the safe harbour in PCG 2016/5). Dana in her discussion indicated that the ATO won’t apply compliance resources in such circumstances where a loan repayment deferral and/or discount is applied to the fund.
It is important that the trustee appropriately documents the reasons for this change concurring due to COVID-19, clearly articulating how they have come to that arrangement (e.g. inability for tenant to meet rental requirements of lease, or members inability to make contributions due to job loss or reduction in hours);
The ATO will shortly publish an additional information of the COVID-19 FAQs page to support the decision to not apply compliance resources for 2019-20 and 2020-21 where SMSFs arrangement for a repayment holiday with LRBAs.
What we are doing to help:
Smarter SMSF is currently prepared documents to support how trustees can comply with this regulations. You can contact us on email@example.com if you would like to receive an email once these documents are available.
Non-arm’s length income (NALI)
One of the most topical issues within the SMSF today is the ATO’s current views contained within Law Companion Ruling, LCR 2019/D3 which deals with the operation of non-arm’s length expenditure (amongst other items) in determining whether a scheme exists where the parties are not dealing at arm’s length.
It should be noted that this ruling will not be dealing with anything specifically to do with COVID-19 as it is an ongoing ruling that will have longevity well beyond the Coronavirus (let’s hope so!)
There has been a consultation period on this ruling that has considered many views and concerns from within the SMSF industry and are likely to be addressed final ruling which is likely to be published in late April or early May 2020. This will allow at least a month’s lead time to ensure those that funds that need to make changes from 1 July 2020 have sufficient time to do so.
SMSF lodgement deadlines
With some trustees and tax agents already having gone through the harrowing impacts of the fires, the ATO was providing relief to those impacted with an extension of time for lodgment based upon the relevant postcodes.
We now have a situation where COVID-19 is having a much broader impact on trustees and the broader tax agent community. Whilst it was noted that the ATO is not providing a ‘blanket’ deferral across all sectors, it is acknowledged that SMSFs have some unique circumstances and a broader set of stakeholders to consider including auditors who must complete the independent audit prior to lodgment. It should be noted that the appointment of the auditor also needs to be completed 45 days before the due date of the SMSF Annual Return.
Therefore, to support trustees and tax agents, the ATO will be sending a message that:
- recognises that all businesses have been affected and have a streamlined process for tax agents to process a deferral up to 30 June (6 weeks) for lodgment. The rationale is that it covers time where people are impacted by the additional pressures in transitioning to a work-from-home (WFH) arrangement; and
- this extension of time naturally applies to assist with auditor as well to ensure the audit is completed before lodgment
Note that the ability to apply for the extended deferral can occur now. Furthermore, where the extension is granted, this will also extend to the TBAR obligations as well where the fund is an annual reported of transfer balance account (TBA) events.
Transfer Balance Cap
It was noted to the ATO that when the introduction of the transfer balance cap was introduced, the explanatory memorandum (EM) to the law changes suggested that where such significant economic events occurred that materially impact member balances, it may consider adjustments to the transfer balance cap.
Any decision for this ultimately rests with the Government to make a decision to pursue. In reality right now, the expectation would be a lengthy path, not only due to it not being a high priority, but would likely require it needing to via a considered view of the Council of Financial Regulators (CFR) before going to the Government for consideration to make such a change.
ATO’s compliance approach
Given the current levels of uncertainty, it was pleasing to be reassured that ATO will not be commencing any new compliance activity around SMSFs.
The key areas that will remain a focus within the SMSF sector are:
- Ensuring that normal ATO procedure of identity and fraud checks will continue for anyone applying to establish a new SMSF; and
- Supporting trustees who wish to enter into any voluntary disclosure arrangements to assist resolving compliance issues.
With existing compliance activities that are current happening – the ATO is provided trustees with the ability to either continue down the path of resolution, but is also having active discussions to pause and defer for a period of time where it may be appropriate given the circumstances.
However, one thing is clear… Once normality resumes, ATO will continue with revised approach to their compliance program following an internal review (post Financial Services Royal Commission) of how penalties are more consistently applied to trustees.
The key message here is that the ATO is looking to support trustees and tax agents, in particular at this time and are not looking to impose further penalties given the significant hardship. It kind of makes it the ‘perfect opportunity’ for disclosure if concerns actually exist.
You can register for Smarter SMSF’s free upcoming webinar on Tuesday, 7 April 2020 at 2:00pm AEST and join CEO, Aaron Dunn as he discusses the impact of the COVID-19 Government measures that have been announced, along with how the Regulator is responding and supporting trustees during this time.
Please note that the ATO will be updating the COVID-19 page for SMSFs at least weekly, so ensure
If you do come up with any issues that you feel need clarification, please feel free to get in contact with us and we cam ensure that such responses are delivered through the appropriate channels to be acted upon accordingly.