With the current economic impacts of the COVID-19 causing significant financial distress to many industries forced to reduce staff and costs or temporarily close. Many SMSFs have been approached by their tenants asking for rent relief to help them during these testing times. This would normally raise significant compliance issues given all dealings within the fund need to be at arm’s length.
However, the ATO has released some guidance on providing relief to SMSFs by agreeing not to take any action for the 2019–20 and 2020–21 financial years, where an SMSF gives their tenant temporary rent reduction, even where the tenant is related to the Trustee.
What is the best way to provide rent relief?
- You should first ask from your tenant a formal request for rent relief that outlines the circumstances why rent relief is warranted. The financial impact must be linked to COVID-19, you must be able to demonstrate a reduction of business from March 2020 onwards.
- The Trustee should document the commercial justification why such an arrangement is in the best interests of the SMSF.
- The Trustee should only provide rent relief on a temporary basis, this may be an agreed period, until social distancing has ceased or to be reviewed month by month basis.
- The rent relief applied can be from 1% to 100% reduction
Can a related party tenant repay the rent later?
- Commercially this is in the best interest of the SMSF.
- The rent arrears agreement needs to be documented and a repayment plan also documented to ensure the rent outstanding is repaid by 30 June 2021.
Can I provide lease incentives?
The relief is only for rent relief and does not extend to lease incentives
Can I reduce my loan repayments to my related party LRBA if my income is reduced?
Yes, The ATO published the following response on their FAQ section:
“We understand that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a related party due to the financial effects of COVID-19.
If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, we will accept the parties are dealing at arm’s length and the NALI provisions do not apply. For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.
The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will catch up any outstanding principal and interest repayments as soon as possible.
Any further repayment relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time.”
Refer to the Australian Banking Association COVID-19 FAQ section for commercial terms offered by banks during this time.
If you have any questions around this, or would like to speak with an advisor, please contact the Partners Wealth Group Audit team today, and they will be more than happy to help you.