ATO SMSF Rent Relief for Related Party Tenants

SMSF Rent Relief for Related Party Tenants

The ATO has announced it will not be taking compliance action for the 2020 and 2021 financial years where an SMSF provide rent relief to a related party business leasing commercial property from the fund. So if your business has a lease agreement with your SMSF for it’s premises / property being forced to pay market rent at while being impacted by Coronavirus is one less thing for business owners to worry about.

Update: Government Announces Code of Conduct for Commercial Tenancies

The Prime Minister has announced a mandatory code for commercial rents, which will apply if a tenant or landlord is eligible for JobKeeper payments and have turnover less than $50 million.The code will comprise “good faith leasing principles” that will be applied through binding mediation, and enforced in state and territory laws.

Landlords must reduce rents in proportion to the losses to their tenant’s business, and waivers must be at least 50 per cent of the reduction in turnover. They are also banned from terminating a lease or drawing on tenants’ securities.

Tenants must honour their lease.

Read more here: Code of Conduct for Commercial Tenancies including SMSFs

ATO Announces SMSF Rent Relief

The ATO has announced that it will allow SMSFs that have a lease agreement in place with a related-party business tenant to temporarily reduce rent due to the business and economic impact of Coronavirus / COVID-19.

The following has been provided from the ATO on their website in regards to SMSF Rent Relief COVID-19 Temporarily Reducing Rent:

Question: My SMSF owns real property and wants to give my tenant – who is a related party – a reduction in rent because of the financial impacts of the COVID-19. Charging a related party a price that is less than market value is usually a contravention. Given the impacts of the COVID-19, will the ATO take action if I do this?

Answer: Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action where an SMSF gives a tenant – who is also a related party – a temporary rent reduction during this period.

We understand that during the extreme business and economic conditions relating to COVID-19, many businesses would have already stopped paying their SMSF landlord rental under their current lease agreement to help ensure their survival of their business.  This announcement on the ATOs approach to SMSF rent relief is welcomed and provide some minor, but potentially important relief for SMSFs trustees that have a rental agreement in place with a related party business or company.

SMSF Rent Holidays or Rent Abatement Periods

It will be possible for an SMSF landlord to provide rent relief (such as a rent free period) under their lease agreement provided the SMSF can establish it is in the best interests of the SMSF. The specific adjustments to the rental agreement between the SMSF and the related party business tenant will depend on:

  • the circumstances of each business tenant, including its cash flow, operations and the restrictions imposed by COVID-19
  • the terms of the existing lease
  • the property the subject of the lease, including its location and the ability for it to be leased to another tenant
  • comparative rent relief (and other incentives) being offered by arm’s length landlords.

Because of the seriousness of the SIS Act compliance risks, obtaining sufficient evidence to justify the rent relief (or other incentive) will be vital. It is also essential the new arrangement is properly documented.

It’s extremely important that SMSF trustees document and provide evidence of their decisions to provide their related party business SMSF rent relief as this will be utilised by the independent auditors of the fund to determine whether the SMSF rent relief is appropriate and at arms-length for the situation.

Arms-length SMSF Rental Arrangements

Provided an SMSF can show it’s dealing with it’s related party tenant on an arms-length basis when it comes providing SMSF rent relief, it can provide the related party business a rent holiday.

Further information on dealing with a related party tenant at arms-length can be found on our blog here: Renting a commercial property owned by your SMSF

The key for SMSF rent relief is: Would the SMSF as the landlord offer the same terms to an unrelated third party business tenant?

If the answer is yes, then it’s likely the adjustments to the SMSF rental agreement with the related party tenant would be on arms-length. If the answer is no, then there could still be compliance issues for the SMSF.

Example 1: An SMSF owns a cafe premises which is leased to a related party business which operates the cafe and has been paying arms-length commercial rent under it’s lease agreement with the SMSF.  Due to the COVID-19 business restrictions, the turnover of the cafe business has reduced by 75% as they can only serve takeaway coffee, catering deliveries and takeaway food. The business only has enough turnover to keep a couple of key staff employed at reduced hours and to pay essential suppliers.  There is no capacity to pay the previous arms-length rent and continue to operate.

In this example the landlord could temporarily provide full SMSF rent relief to the related party business until trading conditions return to normal.

Example 2: An SMSF owns a warehouse which is leased to a related party transport business. The transport business services companies that are part of the supply chain for the major supermarkets. Demand for the transport businesses services have increased due to COVID-19 with drivers and other employees undertaking additional shifts to meet demand. The related party transport business has always paid arms-length commercial rent which has been independently appraised every three years and currently has no cash flow challenges by continuing to pay commercial rent.

In this example, there landlord should not provide temporary SMSF rent relief to the related party business as although trading conditions are not normal, any discounts or rent free periods under the existing lease agreement would NOT be at arms-length and by artificially providing a financial benefit to the related-party business could also result in a breach of the sole purpose test as well as be considered financial assistance to members of the fund.

The above examples are at either end of the spectrum when it comes to the business impacts of COVID-19 on SMSFs leasing commercial property to related party business tenants. In practical terms its likely the SMSF rent relief provided will be some where between nothing, and 100% of rent to an extended period of time (even after Coronavirus business restrictions are lifted).

SIS Act compliance issues

The following has been provided by Cooper Grace Ward: SMSF landlords: can you agree to COVID-19 rent relief?

An SMSF that provides rent relief (or other incentives), risks breaching a number of SIS Act compliance provisions, including the following:

  • Sole purpose test – as the reason for offering the rent relief (or other incentive) could be viewed as to assist the tenant, not increasing the retirement benefits of the SMSF members.
  • Financial assistance – as the rent relief (or other incentive) will provide a financial benefit to the member or relative personally (either directly or indirectly) outside the SMSF.
  • Arm’s length dealing – as it could be difficult to establish the SMSF is dealing with the tenant in the same manner as they would an unconnected tenant

A strict interpretation of these rules requires the SMSF to enforce the terms of an existing lease, including taking all necessary steps to collect the full rent payable, potentially down to taking possession or enforcement action. This is the case even if this would have a detrimental impact on the tenant or the members (personally).

Standard provisions in leases regarding the ability to amend the lease term and charging interest on rent shortfalls, will not help the SMSF overcome the potential SIS Act compliance consequences.

If rent relief (or other incentive) is provided without obtaining sufficient evidence or properly documenting the arrangement, there is a high risk of the ATO taking adverse action against the SMSF, such as administrative penalties of up to $12,600 per breach per trustee or non-compliance.

It is critical that rent relief (or other incentive) is not provided by an SMSF without them first obtaining proper advice in relation to the SIS Act compliance consequences.

SMSFs and Limited Recourse Borrowing Arrangements (LRBAs)

Where an SMSF has purchase commercial property using an SMSF limited recourse borrowing arrangement (LRBA) and is unable continue to pay the loan repayments to the SMSF lender, the provision of SMSF rent relief to the business tenant (related or unrelated third party) will not assist, in fact it will provide a cash flow issue for the SMSF.

SMSF trustees who have a LRBA loan from a bank should contact the lender and see what repayment relief if available for the loans.  Here is a list of SMSF loan providers and links to the Coronavirus / COVID-19 relief they can provide:

Our advice is to engage with your SMSF loan provider early and see whether your SMSF is eligible for deferred repayments on the SMSF loan – even if your business or commercial tenants are still paying rent.

It’s also worth reminding SMSF trustees that SMSF loans are all ‘limited recourse’ in nature.  This means if there is a default, the banks / lenders only have claim to the property used as security for the SMSF mortgage, they cannot make claim on any other assets of the SMSF (although where personal guarantees have been signed by the members of the SMSF there may be other ramifications and advice should be sought).

Other questions on SMSF rent relief

The following are other questions relevant to this topic:

  • Can my business stop paying rent to my SMSF?
  • Can I evict my tenant for not paying rent to my SMSF?
  • What is an arms-length arrangement when it comes to COVID-19 rent relief?
  • ATO temporary rent reduction for SMSFs
  • Can my SMSF buy my business premises?
  • Can SMSF landlords provide rent relief to related business tenants due to COVID-19?
  • Can my SMSF provide a rent waiver to my business?
  • Should my SMSF provide a new lease agreement to my business due to COVID-19?
  • Business can’t pay rent to SMSF due to Coronavirus
  • SMSF rent relief SIS compliance risks

If there are other questions you have, please contact us and let us know.

Key actions SMSF trustees should take:

  • If your SMSF has an loan contact your bank / lender and see what relief is available
  • If your SMSF is leasing a commercial property to a related business that can’t pay rent, get something in writing on what rent relief is being provided and why
  • Keep up to date with Government support that may be available and also your obligations as a landlord during COVID-19
  • Communicate with your professional advisers and seek their guidance wherever possible

It’s essential that businesses survive through the COVID-19 pandemic.  SMSF landlords have an essential role to play to ensure their business tenants survive and can recommence ‘normal’ operations as soon as possible once business lock-downs are lifted.

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SMSF Specialist at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. I can assist with SMSF setup, SMSF tax and accounting, SMSF pensions and ensure SMSF investments comply with the SMSF laws and regulations.