We have seen swift action by the Australian Taxation Office (ATO) to support the SMSF industry across a range of areas that have been impacted by the coronavirus pandemic. Through a rational and reasoned process, the Commissioner in many circumstances won’t apply compliance resources to potential compliance breaches in areas such as rental relief being provided to tenants or where loan repayment relief may be granted.
It is however still required for the approved auditor to form an opinion for the 2019-20 and 2020-21 financial years in respect to these issues as to whether the arrangement represents a commercial or arm’s length dealing.
The ATO has recently published additional guidance to provide assistance for auditors as to how they may specifically deal with these matters and in particular suggest a range of external resources including:
- National Cabinet Mandatory Code of Conduct for commercial leasing principles (“the Code”); and
- Information on the Australian Banking Association’s website for commercial loan relief.
It will remain up to the auditor to use their professional judgment to form an opinion on the commerciality of the arrangement providing:
- the relief looks reasonable; and
- the trustee is able to show evidence the relief was documented and offered as a result of the adverse financial impacts of COVID-19
Dealing with other compliance breaches
In utilising the above published resources available to assist in determining whether arrangements are operating on commercial terms due to COVID-19, there may be other contraventions of the super laws in respect to rent or loan relief. Additional contraventions may occur where rent relief is offered to a related party such as:
- the in-house asset (IHA) provisions as a rental deferral can amount to a loan; and
- Sole purpose test and providing financial assistance to a fund member (see SMSFR 2008/1)
The ATO also recently extended rental relief to interposed entities, such as where a fund holds property via a unit trust or company. In these circumstances, such relief being provided can create significant problems where it may trigger a breach outlined within SISR 13.22D and causing the fund’s investment in the interposed entity to become an in-house asset. Such contraventions would not see compliance action by the ATO, which includes not imposing penalties or disqualifying trustees.
Updating ACR instructions
To assist auditors with their audit function for the 2019-20 financial year, the ATO is updating the Auditor Contravention Report (ACR) instructions to state that auditors will not need to report these breaches in the ACR. The SMSF independent auditor’s report should nevertheless still be modified for material contraventions in accordance with the auditing standards.
Where an auditor is not satisfied that:
- the relief offered by the trustee is on commercial terms; or
- it has been offered due to the adverse financial impacts of COVID-19
the auditor should report the contravention and explain in the ACR why they think there is a breach. The ATO will then explore the situation further and where they subsequently find the relief was genuinely provided as a result of COVID-19 then they will not take any compliance action against the fund.
Smarter SMSF has created a range of COVID-19 SMSF documents to ensure that trustees are complying with the relief being provided by the Federal Government and Regulators.
You can visit our COVID-19 page for further information about the documents available for use.