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The Australian Taxation Office has responded to widespread concerns on whether SMSF landlords providing rent relief to tenants due to the financial impacts of the novel coronavirus is a contravention of the SIS Act.
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ATO clarifies COVID-19 rent relief concerns
30 March 2020
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In anticipation of the third stimulus package expected to be announced this week, Prime Minister Scott Morrison said in a press briefing on Sunday that the national cabinet has considered issues relating to commercial tenancies as well as residential tenancies.
“The most significant of those is that state and territories will be moving to put a moratorium on evictions of persons as a result of financial distress if they are unable to meet their commitments,” Mr Morrison said.
“And so there will be a moratorium on evictions for the next six months under those rental arrangements.”
The industry has been seeking clarity from the ATO around whether SMSF landlords can legally provide rent relief to tenants as a result of the impacts of COVID-19.
In response, the ATO has sought to allay concerns from SMSF trustees around whether charging a tenant rent that is less than market value contravenes the SIS Act, and whether it would take action given the impacts of COVID-19.
The ATO’s response is as follows:
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“Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of 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.”
SMSF administrator SuperConcepts backed the ATO announcement, saying it has been inundated with calls and emails from concerned clients who have an SMSF which owns a business premise that is being leased to a related party.
“SuperConcepts fully supports this relief measure which provides certainty and much-needed relief for a growing number of SMSFs that own a business premise, and have been caught in the economic turmoil caused by COVID-19,” said SuperConcepts general manager of technical education services Peter Burgess.
Interpreting the ATO concession
SMSF law firms have also come out with their interpretations of the ATO’s concession for landlords.
According to CGW Lawyers partner Clint Jackson, the only requirement of the ATO’s concession is that the rent reduction must be temporary.
“Given the current business challenges, the ATO’s position is that there is no need for the rent reduction provided to be justified by market evidence (the SMSF can determine the reduction in its absolute discretion),” Mr Jackson said.
“The ATO’s concession does not apply to any other lease incentives or relief — just a ‘temporary rent reduction’.”
Mr Jackson said that while the ATO concession is “extremely broad”, it is also important that landlords not abuse the concession.
“This rent reduction should be reasonable and measured to the COVID-19 impact suffered by the tenant. Best practice is that it is consistent with the approach taken by arm’s-length landlords,” he said.
“The rent reduction agreed to by the SMSF should be properly documented, as this is an amendment to the lease terms.
“It is likely that SMSF auditors will be required to report any rent reductions, although the exact parameters of what will be reported in relation any rent reductions are still being determined.”
However, Daniel Butler and Bryce Figot of DBA Lawyers said that while the ATO will not actively seek out cases where an SMSF gives a related-party tenant a temporary rent reduction during the remainder of FY2020 or FY2021, the usual position for such practical approaches previously issued by the ATO is that if it does come across contraventions from other sources through its usual data detections, reviews or auditor contravention reports (ACR), it will usually apply the legislation in the normal manner.
“In short, SMSF trustees should not rely on the ATO’s non-binding practical guidance above, given the substantial downside consequences and given these situations may be legitimately resolved with appropriate action as outlined below,” said Mr Butler and Mr Figot.
“We do understand, however, that some SMSF trustees or businesses may not have the time or the funding to obtain proper advice and work through the appropriate steps to soundly position themselves to minimise future risk that will simply rely on the ATO practical approach at their own risk.”
Further, Mr Butler and Mr Figot said the ATO website does not provide any express relief for an SMSF that owns property via an interposed unit trust, such as a non-geared unit trust (NGUT).
“Once a contravention of one of the criteria relating to a NGUT is triggered under reg 13.22D of SISR, the trust is ‘forever’ tainted and the SMSF must dispose of its units in that unit trust to comply with the SISR,” they said.
“In particular, if the lease is not legally enforceable or if rent owing by a related-party tenant accrues and constitutes a loan under the lease, the unit trust will cease to comply with the criteria in division 13.3A of SISR.”
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