As various states and territories continue to navigate their way out of the pandemic, it was becoming abundantly clear for the Regulator to extend the relief for a number of SMSF COVID-19 relief measures that were previously granted for the 2019-20 and 2020-21 financial years. We have now seen the ATO publish an update confirming this relief to be extended for the 2021-22 financial year.
This extension of COVID-19 relief applies to:
- SMSF residency relief
- Rental relief
- Loan repayment relief
- In-house asset relief
SMSF residency relief
Due to the significant travel restrictions of returning Australians, there are a number of people that remain stranded overseas. As a result, this is causing individuals to be temporarily out of Australia for more than the two year ‘safe harbour’, which may ultimately affect whether an SMSF will continue to meet the central management & control (CM&C) requirement within the residency rules of an Australian super fund for tax purposes. Failure of this requirement impacts the complying status of the super fund and entitlement to receive tax concessions.
In the updated guidance, the ATO has continued to affirm the approach that provided there are no other changes in the SMSF or to the individual(s) circumstances affecting the other residency conditions, the ATO will continue to not apply compliance resources to determine whether the fund meets the residency test.
In circumstances where rental relief has been provided by a SMSF, or a related non-geared company or unit trust, to a tenant in the form of a reduction, waiver or deferral, this would normally give rise to a contravention of the super laws, however the ATO has reaffirmed it’s position to not take any compliance action against fund trustees provided:
- the relief is offered on commercial terms (having regard to State and Territory COVID-19 support measures) due to the financial impacts of COVID-19, and
- you have properly documented the arrangement.
With this extension of rental relief being provided for 2021-22, the ATO plan to make a determination similar to Self-Managed Superannuation Funds (COVID-19 Rental income deferrals – In house Asset Exclusion) Determination 2020 for the 2021-22 financial year. This additional relief will ensure that a rental deferral offered by an SMSF (or a related party) to a tenant does not cause a loan or investment to be an in-house asset (IHA) in the current and future financial years.
Whilst the ATO finalises the determination, they will adopt the above compliance approach.
Demonstrating commercial terms
For related party rental arrangements where the fund has business real property (BRP), to demonstrate an arm’s length dealing, as was the case throughout the 2019-20 and 2020-21 financial years, consideration of any rental relief should be in line with the various State based regulations – generally speaking, these replicated the National Cabinet’s Mandatory Code of Conduct for commercial tenancies:
- Victoria – Commercial tenancy relief scheme (Vic) 2021
- NSW – Retail and Other Commercial Leases (COVID-19) Regulation 2021
From an SMSF audit viewpoint, it will be critical for demonstrate how relief is being offered on commercial terms due to the financial effects of COVID-19. If there is insufficient appropriate evidence to support the relief, including that it is offered on commercial terms, SMSF auditors should report this to the ATO via an ACR where the reporting criteria is met.
Loan repayment relief
If loan repayment relief is provided by a SMSF to a related or unrelated party due to the financial impacts of COVID-19, and the relief is offered on commercial terms and the changes to the loan agreement are properly documented, the ATO has indicated that it will not take any compliance action against the fund.
If a SMSF has a limited recourse borrowing arrangement (LRBA) in place with a related party and the lender offers loan repayment relief to the fund due to the financial impacts of COVID-19, the Commissioner will accept the parties are dealing with each other at arm’s length, and the arrangement does not give rise to non-arm’s length income, provided:
- the relief is offered on commercial terms (having regard to the terms of relief offered by commercial lenders for real estate investment loans – e.g. ABA updated guidance), and
- that changes to the loan agreement have been appropriately documented.
In-house asset relief
The ATO also extends relief where a SMSF has exceeded the 5% IHA threshold at 30 June 2021 due to the financial impacts of COVID-19. As was previously the case, it is incumbent upon trustees to still prepare a written plan to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022.
However, the ATO will not take any compliance action against a fund where the trustees have not executed the plan by 30 June 2022 due to the financial impacts of COVID-19 – e.g. because the fund is unable to execute the plan because the market has not recovered in some areas, or it may be unnecessary to implement it as the market has recovered.
In addition to the above compliance concessions provided for SMSF trustees, it should also be noted that for the 2021-22 financial year, the Federal Government has also extended the 50% temporary reduced minimum pension requirements – this measure was formalised late in June through Superannuation Legislation Amendment (Superannuation Drawdown) Regulations 2021.