Date of article: 21 April 2020
Last updated: 4 September 2020
The Australian Taxation Office (ATO) has provided some additional guidance on certain SMSF arrangements due to the impact of COVID-19.
Related party limited recourse borrowing arrangements
SMSF landlord providing rent relief, including related party tenant
SMSF residency – two year rule
Where the SMSF has existing limited recourse borrowing from related party, and the related party lender offers repayment relief to the SMSF that is similar to what commercial banks are offering, the ATO will accept that the parties are dealing at arm's length.
The ATO provide the following question and answer:
"Question: My SMSF has a compliant limited recourse borrowing arrangement (LRBA) in place with a related party. Would the non-arm's length income (NALI) provisions apply if the related party offers repayment relief to the SMSF trustees because of COVID-19?
Answer: 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."
Currently, the Australian Banking Association states that commercial lenders are providing loan repayment relief on the following basis:
Similarly, any further relief sought due to the continued effects of COVID-19 must remain in line with what commercial banks are offering at that time.
ATO guidance provides that as long as the trustee can provide evidence of loan repayment relief that replicates what the commercial banks were offering for real estate investment loans at the time they accepted the relief, then they will have demonstrated that the parties have dealt at arm’s length.
The ATO requires the parties to the arrangement to document the change in terms to the loan agreement and the reasons why those terms have changed.
Interest charge will continue to accrue and capitalised on the loan in the accounts of the SMSF.
Landlords may be requested or have been requested to give their tenants rent reduction, waiver or deferral because of the effects of COVID-19. The ATO guidance states that where SMSF landlord provides tenant, including related party tenant, a temporary rent reduction, waiver or deferral during the 2019-20 year (starting from the time COVID-19 impacted) and 2020-21 year, the ATO will not take any compliance action.
The Mandatory Code of Conduct for Commercial Leasing Principles During COVID-19 provides a framework for temporary leasing relief during COVID-19. This code may assist SMSF trustee with related party tenant to agree on an arrangement.
The ATO provides the following question and answer:
"Question: My SMSF owns real property and wants to give my tenant – who is a related party – a reduction in rent because of the financial effects of COVID-19. Charging a related party a price that is less than market value is usually a contravention. Given the effects of COVID-19, will the ATO take action if I do this?
Answer: Some landlords are giving their tenants rent relief as a rent reduction, waiver or deferral 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 – even one who is also a related party – a temporary rent reduction, waiver or deferral during this period.
If your SMSF holds an interest in an interposed entity such as a non-geared company or unit trust and that interposed entity leases property to a tenant, we will not treat the investment in the interposed entity as an in-house asset for the current and future financial years as a result of a deferral of rent being provided to the tenant due to the financial effects of COVID-19.
If there are temporary changes to the terms of the lease agreement in response to COVID-19, it is important that the parties to the agreement document the changes and the reasons for the change. You can do this with a minute or a renewed lease agreement or other contemporaneous document."
The ATO requires certain requirements to be met.
The ATO has provided limited relief to the two year rule where an individual trustee or director of corporate trustee is stranded overseas due to COVID-19.
The ATO provides the following question and answer:
"Question: After temporarily residing overseas for less than two years, we were about to return to Australia but became stranded overseas because of the COVID-19 health crisis. This forced absence means we will be out of Australia for more than two years. What will this mean for our SMSF?
Answer: An SMSF must be an Australian super fund to be a complying fund and receive concessional tax treatment.
To be an Australian super fund an SMSF must meet three residency conditions, see Check your fund is an Australian super fund (on the ATO website). The second and third conditions are relevant in this case.
The COVID-19 health crisis has resulted in many countries imposing travel bans and restrictions and a high degree of uncertainty generally around international travel.
If the individual trustees of an SMSF or directors of its corporate trustee are stranded overseas due to COVID-19, in the absence of any other changes in the SMSF or the trustees' circumstances affecting the other conditions, we will not apply compliance resources to determine whether the SMSF meets the relevant residency conditions."
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