30 June 2020 year end audit areas of focus – Part 1

Temporary COVID-19 Relief | Providing Rental Reduction

The ATO has confirmed that SMSFs can provide a temporary rent reduction to tenants, including a tenant who is a related party or related trust.

Although the temporary rent reduction to a related party tenant less than market value is likely to trigger a range of SIS Act compliance breaches, the ATO has indicated that it will not take compliance action for either the 2020 or 2021 financial years. As a result, an SMSF can provide a temporary rent reduction immediately without fear of the ATO taking adverse action.

SMSF landlords should provide rent reduction to tenants who are suffering the effects of the COVID-19 crisis. 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.

Some key requirements when trustee dealing with tenants affected by COVID-19 include:

• Trustee will need to demonstrate that granting any concession is consistent with what arm’s length parties would agree to do and is in the best interests of the fund and its members.
• Clear arrangements which detail the amount of discount, waiver or deferral of the rent. In evidencing that the rent relief is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length landlord.
• The rent reduction agreed to by the SMSF should be properly documented (as this is an amendment to the lease terms)

However, granting rental relief where not carefully justified and documented, can present considerable compliance risks for SMSF landlords. This includes fines under the SIS Act of up to $12,600 per trustee and/or in serious instances the SMSF being deemed non-complying, in which case the value of its assets as at the commencement of the income year could be taxed at 45%.

What audit action / response is required?

The SMSF auditors are required to report contraventions to ATO if any of the below conditions are not satisfied:

• the relief offered by the SMSF trustee or interposed entity is on commercial terms;
• the relief has been offered due to the adverse financial impacts of COVID-19;
• the relief arrangement has been adequately documented.