COVID-19 has had a significant financial effect on SMSFs, particularly in some states or territories where there have been reoccurring and prolonged lockdown periods and some trustees of an SMSF may still find they are having to provide or accept certain types of relief, which may give rise to contraventions under the super laws.
COVID-19 has also resulted in many countries imposing travel bans and restrictions, and you may have become stranded overseas for long periods, which can affect a fund’s residency status.
The Australian Taxation Office is now offering support and relief to SMSF trustees for the 2019-20, 2020-21 and 2021-22 income years.
Trustees must properly document the relief and provide their approved SMSF auditor with evidence to support it for the purposes of the annual SMSF audit.
SMSF residency relief
If a trustee is stranded overseas due to COVID-19, and this causes them to be out of Australia for more than two years, this may affect whether their fund meets some of the residency conditions to be an Australian super fund for tax purposes.
The ATO said the SMSF must be an Australian super fund at all times during the income year to be a complying super fund and receive tax concessions.
To be an Australian super fund under the tax laws an SMSF must meet three residency conditions.
In particular, being overseas for an extended period may affect whether the:
- Central management and control of the fund is ordinarily in Australia
- Fund satisfies the “active member” test
Provided there are no other changes in the SMSF or the trustees’ circumstances affecting the other residency conditions, the ATO will not take any compliance action to determine whether the fund meets the residency test.
For more information, see TR 2008/9 Income tax: meaning of “Australian superannuation fund” in subsection 295-95(2) of the Income Tax Assessment Act 1997.
Rental relief
Due to the ongoing financial effects of COVID-19, a fund, or a related party of a fund, may have offered rental relief to a tenant in the form of a rental deferral, reduction or waiver.
This relief may have been provided as part of the COVID-19 support measures offered by the states and territories, including those introduced to give effect to the principles of the National Cabinet Mandatory Code of Conduct (PDF, 235KB). This link will download a file.
As charging a tenant less than market value rent usually contravenes the super laws, the ATO is offering the following rental relief, provided certain conditions are met.
Rental reductions and waivers
Rental relief provided by an SMSF, or a related party of the fund (non-geared company or unit trust), to a tenant in the form of a reduction or waiver ordinarily gives rise to reportable contraventions of the super laws.
For example, the arrangement may:
- Not comply with the sole purpose test and/or arm’s length requirements
- Contravene the prohibition on providing financial assistance to a member or a member’s relative
However, the ATO will not take any compliance action against a fund and/or ask an approved SMSF auditor to report any contraventions to us provided:
- The relief is on commercial terms, that is, it is provided on comparable terms to relief offered by other landlords to unrelated tenants in similar circumstances (having regard to the state and territory COVID-19 support measures).
- The relief is offered due to the financial impacts of COVID-19.
- It has been properly documented in the arrangement.
Rental deferrals
If a fund, or a related party of the fund, offered rental deferral relief to a tenant, this may give rise to contraventions of the in-house asset rules in the super laws.
This is because:
- A rental deferral provided by a fund to a related party tenant is considered a loan to the related party, which would ordinarily be an in-house asset of the fund.
- If a fund has an investment in a related non-geared company or unit trust that is exempt from being an in-house asset under the super laws, and the related party provides a rental deferral to a tenant, this will cause the exemption to cease and the investment to become an in-house asset.
If the value of the asset, or the total value of the fund’s in-house assets, exceeds the 5 per cent in-house asset threshold at the end of the income year, the fund ordinarily needs to dispose of the asset, or the excess before the end of the next income year.
For the 2019-20 and 2020-21 income years the ATO is offering the rental relief set out in Self-Managed Superannuation Funds (COVID-19 Rental income deferrals – In-house Asset Exclusion) Determination 2020 External Link.
For the 2021-22 income year the rental relief is set out in Superannuation Industry (Supervision) Self-Managed Superannuation Funds (COVID-19 Rental Income Deferrals – In-House Asset Exclusion) Determination 2022 External Link.
These determinations ensure that a rental deferral offered by a fund, or a related party, to a tenant during the 2019-20, 2020-21 or 2021-22 income years does not cause a loan or investment to be an in-house asset of the fund in those income years, and future financial years, provided certain conditions are met.
Documenting the rental relief
Temporary changes to a lease agreement to provide for rental relief need to be properly documented, together with the reasons for those changes.
This can be done using a signed trustee minute. However, the ATO considers it prudent to document the changes with an agreement signed by both parties, which can be attached as an addendum to the existing lease agreement.
A review of the existing agreement should also be done in case a formal variation of the lease needs to be drafted, or a lease renewed to give effect to the rental relief.
The parties must comply with the new lease arrangement to ensure the fund is not in breach of the super laws.
In-house asset relief
If the value of a fund’s in-house assets exceeds 5 per cent of the fund’s total assets as at 30 June of an income year, the “in-house asset rules” in the super laws ordinarily require you to prepare and execute a written plan to reduce the market value ratio of the fund’s in-house assets to below 5 per cent by the end of the following income year.
The ATO said it understands that the downturn in the market due to COVID-19 may have caused:
- A fund’s assets to drop in value
- The value of a fund’s in-house assets to exceed the 5 per cent threshold as at 30 June of the 2019-20, 2020-21 or 2021-22 income years
Loan repayment relief
Repayment relief provided by SMSF
The ATO said in some situations a fund may have offered loan repayment relief in relation to a loan made to a related or unrelated party that was experiencing difficulty repaying the loan due to the financial impacts of COVID-19.
Such repayment relief may ordinarily give rise to contraventions of the super laws (for example, because the arrangement does not meet the sole purpose test and/or comply with the arm’s length requirements).
If the loan repayment relief is provided due to the financial impacts of COVID-19, the relief is offered on commercial terms and the changes to the loan agreement are properly documented:
- The ATO will not take any compliance action against your fund.
- An approved SMSF auditor will not need to report any contravention of the super laws to us.
Where the loan is made to a related party, the loan will be an “in-house asset” of the fund. Our in-house asset relief will apply to any potential contravention of the “in-house asset” rules if the fund’s 5 per cent in-house asset threshold is exceeded as a result of providing the loan repayment relief.
SMSF limited recourse borrowing arrangement relief
If an SMSF has a limited recourse borrowing arrangement (LRBA) in place with a related party lender, the lender may have offered loan repayment relief to the fund due to the financial impacts of COVID-19.
If the relief is not offered on arm’s length terms, this may ordinarily give rise to a contravention of the super laws. The non-arm’s length income rules may also apply.
The ATO 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).
- The changes to the loan agreement have been properly documented.
- Document any changes in terms of the loan agreement and the reasons why those terms have changed. The ATO said interest continues to accrue on the loan and that will be repaid and any deferred principal and interest repayments in accordance with the varied terms.
If a fund has entered into an LRBA with a related private company and repayment relief has been given in relation to a division 7A loan, additional relief applies in relation to the capitalisation of interest and minimum yearly repayments.
