Normally, a Self-Managed Superannuation Fund (SMSF) that owns property would not be able to grant rent relief to a related commercial tenant, due to the non-arm’s length income rules. However, this changed following the Prime Minister’s press conference on Sunday 29 March 2020, in order to assist businesses impacted by Covid-19.
The Previous Rules
The non-arm’s length income rules provide that if an SMSF landlord leases premises to a related business (e.g. a business run by a family member or a different entity with the same directors), the rental terms must be based on a valuation by a market expert. A reduction in the rent to assist the tenant would normally breach those rules and result in penalties for the landlord.
It has always been acceptable for a landlord to grant rent relief to a tenant that it is not related to, provided the relief is in the best interests of the fund, because any arrangement between two unrelated parties is considered to be at ‘arm’s length’. That remains the case now.
The ATOs changes
To address this issue, the ATO has recently confirmed that they will not take action against SMSFs that provide tenants (including related parties) with rental relief during the 2019-20 and 2020-21 financial years.
There is no specified amount by which rent can or should be reduced. Landlords and tenants should work together to come to a mutually acceptable solution. Any relief granted will therefore depend on the individual landlord’s and tenant’s circumstances.
The reduction also needs to relate directly to the financial impacts of Covid-19, so the specific impacts on the tenant should be considered in order to reach a reasonable and measured relief amount.
It is important to note however that the announcement is not binding on the ATO, and it is still possible that penalties could be imposed. The situation should be resolved by other means, if possible.
Record keeping requirements
The following records should be kept in relation to any rent relief granted by an SMSF Landlord to a tenant (whether related or not):
- A written request from the tenant for rental relief describing the reasons they need it (e.g. close of business or reduction in income);
- A written reply from the landlord to the tenant granting the relief and describing the new rate and the period it will remain in place;
- The reasons that granting the temporary relief would be in the best interests of the SMSF – for example:
- that the prospects of finding a new tenant are low so a reduction would at least ensure rental income;
- to allow the tenant to continue trading, thereby increasing the likelihood that the tenant will meet the remaining lease terms when circumstances normalise;
- the reduced amount may cover the landlord’s holding costs – e.g. rates, maintenance, land tax and insurance;
- there are risks if the property is vacant, such as break-ins or fires.
In some circumstances, a Deed of Amendment of Lease to document the reduction in rent. We can assist you with drafting this document if required.
What you need to do?
We strongly encourage you to seek legal and financial advice, given the risk of potentially significant penalties if you are considering providing rent relief for a property owned by your SMSF.
If you need further advice regarding rental relief and assistance with preparing a Deed of Amendment of Lease for your SMF, you can contact us by telephoning our office on (07) 3220 2929 or emailing us at email@example.com,
Lauren Black is an Associate in the Property and Business teams at Plastiras Lawyers. Lauren has a particular interest in helping SMEs, property investors and high net worth individuals with a range of property matters, including leasing. Lauren also assists clients with business sales and acquisitions, commercial transactions and estate planning.