Recent developments due to COVID-19 have seen an array of rental reductions, waivers, and deferrals offered by landlords across the country for commercial and residential tenancies. For SMSF trustees who hold real property, there are added complexities coupled with the ongoing changes being announced by the National Cabinet and relevant states and territories.
All of this is further complicated where SMSF members are reliant on the rental income for the continuation of pension payments – however the introduction of the Government’s welcome 50% reduction in minimum pension withdrawals required by pension members for the current year ending 30 June 2020 and the following financial year ending 30 June 2021 will largely assist on this front.
What’s been announced so far
On 29 March 2019, the Prime Minister announced that National Cabinet agreed to a si-month moratorium on evictions “for commercial and residential tenancies in financial distress who are unable to meet their commitments due to the impact of COVID-19”.
Following this announcement, on 7 April 2020, National Cabinet published its National Code of Conduct for commercial tenancies. The mandatory Code of Conduct will be implemented by the states and territories, and SME tenants who are eligible for the JobKeeper program will be automatically eligible
There are many crucial decisions and negotiations SMSF landlords will need to consider and based on the information available today, we’ve outlined below the key areas for consideration as an SMSF trustee landlord, and the actions that you should consider when making these decisions.
For commercial and residential tenancies with a tenant who is an unrelated party of the SMSF, it would be appropriate for the SMSF trustee to negotiate commercial arm’s length terms with the tenant.
Where commercial real property is involved, consider the Code of Conduct and whether the tenant can automatically access it due to their eligibility for the JobKeeper payment.
It will also be necessary for the SMSF trustee to review the terms of the existing lease agreement and document the outcome of the negotiation with the tenant. Gathering any information to support the temporary agreement will become crucial – particularly since evidence will need to be supplied to the SMSF’s auditor as part of year-end compliance to prove that negotiations were made on arm’s length terms. This could take the form of correspondence, minutes, declarations from the tenant and any other documentary evidence to show that negotiations were made on commercial terms.
Related party tenants
In addition to the matters outlined above for unrelated tenants, SMSF trustees must also consider various superannuation laws where the tenant is a related party of the SMSF.
In a welcome move by the ATO, they have stated on their regularly updated COVID-19 FAQs page for SMSFs:
Some landlords are giving their tenants a rent reduction or waiver because of the financial effects 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 if an SMSF gives a tenant – who is also a related party – a temporary rent reduction or waiver during this period.
In addition to considering the matters impacting unrelated tenant agreements (such as compliance with the Code of Conduct), there are some key superannuation compliance law areas for consideration before SMSF landlords finalise any agreement with a related party tenant of commercial premises:
- Sole Purpose Test – This overarching test requires an SMSF to be maintained for the sole purpose of providing retirement benefits for its members (or their dependants). SMSF trustees should ensure that evidence is on file to prove they are acting in the best interests of the SMSF and its members, when negotiating terms with the related party tenant.
- Financial assistance – An SMSF cannot lend or provide financial assistance to a member or relative. This could be contravened by the SMSF if the temporary agreement with the related party tenant is on non-arm’s length terms.
- In house asset provisions – Any unpaid and/or deferred rent agreed between the parties would likely give rise to a loan, which in turn would be subject to the in-house asset limit imposed on SMSFs. Careful consideration of the value of this amount, relative to the market value of the SMSF’s assets, will need to be monitored (so as to not exceed the permitted 5% threshold).
- Arm’s length provisions – Ordinarily, charging less than market value rent to a related party tenant would be in breach of the arm’s length rules. Accordingly, this is where evidence will be key to proving that the temporary rental reduction, deferral or waiver is consistent with an arm’s length dealing.
This is not an exhaustive list, and SMSF trustees are strongly advised to seek specialist advice to navigate the superannuation compliance areas when finalising any temporary rental relief agreement with their related party tenant.
Key takeaways & final remarks
In summary, there are several key actions that SMSF landlords should consider when negotiating any change in rental arrangements with their tenants:
- Document any temporary arrangement made between the parties – the ATO has suggested this could be in the form of “a minute or a renewed lease agreement or other contemporaneous documentation”.
- Collate and keep on file any information or evidence to support the agreement between the SMSF trustee and the tenant (whether related party or not).
- Consider the Code of Conduct and whether it applies to commercial tenancies where applicable.
- Review the lease and seek the assistance of an advisor where necessary.
- Where the tenant is a related party of the SMSF, consider any superannuation law implications of a rental reduction, waiver or deferral before finalising and implementing the agreement between the parties.
- Although the ATO won’t take compliance action regarding rental reductions for related party tenants, it is important that the agreement to reduce (defer or waive) rent is in fact temporary and with respect to the impact of COVID-19.
Although the ATO won’t take compliance action regarding rental reductions for related party tenants, still important for SMSF trustees to consider the above.
Seek advice where necessary – contact your local William Buck Advisor for further information