Phil Broderick

A hot topic for SMSF trustees during the COVID-19 crises is whether SMSF trustees that hold land can offer rent relief to their tenants, in particular to related tenants, without breaching the superannuation laws.

Rent relief by SMSF trustee landlords can potentially cause issues for SMSF trustees. That could include breaches of the sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act)), the prohibition against providing financial accommodation (section 65 of the SIS Act), the prohibition against dealing on a non-arm’s length basis (section 109 of the SIS Act) and the in-house asset rules (Part 8 of the SIS Act). Rent relief is unlikely to breach the non-arm’s length income rules (NALI) on the basis that the SMSF will not receive more income than it should.

For unrelated tenants, offering rent relief is unlikely to breach the superannuation laws as any rent relief will be either negotiated by arm’s length parties or compelled under various State based legislative regimes.

For related tenants (of business real property), the position is not so clear cut. In “normal times”, an arm’s length landlord would be expected to enforce the terms of the lease and any deviation from the lease terms, or altering the terms of the lease in favour of the related tenant, could breach the superannuation laws.  In simple terms, this is because such actions would be a non-arm’s length dealing.

However, during the COVID-19 crises there is arguably no “normal” and, therefore, arm’s length dealings could incorporate discounting rent, deferring rent or both.  This is particularly so for tenants who can avail themselves of the statutory rent relief measures.

So, where does this leave SMSF landlords who want to offer rent relief to their related party tenants? Well, the Australian Taxation Office (ATO ), in its Q&A website material, has confirmed that their “compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action if an SMSF gives a tenant – even one who is also a related party – a temporary rent reduction, waiver or deferral because of the financial effects of COVID-19 during this period.” This applies to both land held by SMSFs and regulation 13.22C unit trusts.  The ATO website material is silent as to what relief can be offered and whether it can be offered to all tenants (even those not suffering a downturn).

This raises the question as to what relief can be offered. In the author’s view, the following should be considered in relation to rent relief granted to related tenants:

• match the rent relief to that which is offered under the various statutory COVID-19 measures (this approach is best practice);
• SMSF landlords could structure their relief against benchmarking materials (e.g. from estate agents) of what relief is being granted in the rental market by arm’s length parties for similar properties; or
• Determine their own terms for the relief (although this carries the greatest risk of being found to be a non-arm’s length dealing).

It is also important, if a SMSF landlord offers rent relief, that the relief be formally documented (e.g. through a deed of variation of the lease or an exchange of letters). It is also recommended that the reasons for offering the rent relief be recorded (e.g. in the formal documents or a trustee resolution).

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Michael Lorimer

Self-managed Independent Superannuation Funds Association (SISFA) has redesigned and is relaunching its membership offering for SMSF trustees. Through existing communication channels and those of new associated partners and sponsors of the Association, up to 200,000 SMSF trustees can be contacted quickly with this membership offer.

“Alongside its advocacy efforts, for some time now SISFA’s focus has been to build a network of likeminded professionals in the SMSF sector to stay informed of technical and policy issues and provide a forum for the exchange of ideas. While this has been successful, it has become noticeable that the needs of 1.1 million SMSF members extend beyond supporting the professionals on whom they rely for advice and expertise.

“SISFA has long debated how to better support these individuals who are essentially ‘running their own money’ (with or without a professional adviser) and often do not have all the knowhow to protect their nest eggs. The financial services sector has taken them for granted and often only taken their own industry agendas to regulators. They have not ignored trustees but rather thought that their agenda would also cover the needs of trustees without involving them in the discussion,” said Michael Lorimer, Managing Director of SISFA.

SISFA believes that ordinary SMSF members need a louder voice in Canberra and greater support from the industry. To this end, they will be offering SMSF members a new annual membership rate of $48 plus GST which will allow them access to a range of services and benefits, including:

• Educational content
• Access to experienced practitioners
• Enhancing SISFA’s advocacy efforts for members in Canberra
• Investment opportunities suitable for SMSFs
• National seminars/webinars provided by SISFA and its Partners
• Newsletters

The introduction of new service providers and offerings to SISFA trustees will correct the imbalance where investment opportunities were only available to large super funds. The SMSF sector is the largest superannuation asset base and deserves access to superannuation investment options.

SISFA has a national reach and is well placed to expand into providing services and a support base for the largest pool of investors in the country.

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The defeated proposals created unintended consequences, says Darren Kingdon, spokesman for Small Independent Superannuation Funds Association (SISFA).

‘These consequences included unwarranted restrictions imposed on in-specie benefit payments, which in effect may have impeded or prevented the winding up of an SMSF,’ he says.

SISFA is the only SMSF industry body representing administrators, accountants, auditors, lawyers, actuaries and advisers.

Broadly, the original proposal broadly was to ban:

• In-specie (in kind) contributions – assets going in to SMSFs from related parties; and
• In-specie payments – assets sold or paid out to related parties.

‘Previously, the Government considered that contributing listed shares to superannuation funds (referred to as in-specie contributions) resulted in tax and contribution cap date manipulation to illegally benefit the SMSF or the related party, despite there being no evidence to this effect,’ he says.

 ‘The matter was already the subject of various ATO rulings & publications,’ he says, and ‘fortunately commonsense has prevailed on both counts’.

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“If this goes ahead, it’s clearly a disaster and really is just the surcharge reincarnated. Although it is proposed to only apply to high income earners, the reality is that the costs of administering such a system will be borne by all super fund members, regardless of their balance or income.  The damage done to the perception of superannuation by such a measure is much higher than the tax actually collected. 

“Will it only be a matter of time before people earning less than $300,000 pa will also have a higher contributions tax? 

“This Government and future governments have to get over seeing superannuation and voluntary contributions as some cash cow that can be raided when other revenue channels are reduced. People have to believe that super is worthwhile and have confidence in the system. 

“And, on top of new rules, we are still awaiting a final announcement on the structure for over-50’s contributions from 1 July 2012,” said Michael Lorimer, Chair of SISFA.

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“It is a practical outcome for trustees and allows for greater flexibility in buying property where the opportunity to add value can enhance the retirement outcome for fund members.

“I have found that many trustees wanting a residential investment have had to primarily consider new, ‘off the plan’ residential developments where the need for improvements was not an issue. This practical change will allow for consideration of older properties that can be sensibly upgraded,” said Michael Lorimer, Chair of SISFA.

Industry concerns that trustees might overcapitalise properties under the new rules is not seen as a major issue or borne out by recent investment history.

“When SMSFs started to grow in numbers and the first round of SMSF lending was allowed, we heard howls that trustees would go broke and lose money because they weren’t in proper managed funds. That has simply not been the case and we have seen in ATO figures that SMSF portfolios are similar to standard balanced portfolios. They have not become over geared property portfolios and we can’t see that this practical change in treating property investments will cause any mayhem,” said Mr Lorimer.

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