The ATO has recently issued reliefs and reminders for self-managed super funds (SMSFs) impacted by coronavirus. The announcements are light on detail, as would be expected at this time. We have summarised them below, and included our own commentary to fill gaps and address questions which will arise. Obviously, no SMSF should act on this post without taking specific legal advice as to their own situation
Rent reductions for commercial properties owned by SMSFs
An SMSF which owns a commercial rental property may give the tenant a discount on rent and other amounts payable. This applies even if the fund leases the property to a related party.
There is no guidance on how much the rent may be reduced by. The trustee still needs to act commercially, as far as that is possible in the extreme conditions of this market. It is expected that trustees will have a very wide scope to act without being regarded as non-compliant. An example of where a rent reduction would not be appropriate is an SMSF which leases premises to a rare business which is doing well from corona (e.g. a seller of essential goods).
To remain compliant when giving a rent reduction the trustee should:
- Get evidence of the tenant’s ability to pay, and take that into account when setting the reduced rent. The tenant’s financials may be changing rapidly over time, so the trustee may need to regularly review the level of discount allowed.
- Obtain anecdotal evidence of rent reductions given by other landlords of similar premises who do not have a related party tenant (if examples are available) keep a record of them and take them into account when deciding on the new rent.
- Record the decision and the reasons in a trustee minute and prepare a formal variation of the lease. Because it is not possible to tell how long the need for the rent reduction will last, the rent could be reduced for say two months initially, and then be extendable or varied at the landlord’s discretion by notice to the tenant. The lease amendment should require the tenant to provide ongoing evidence of its ability to pay, at the trustee’s request. The trustee should ensure that it actually gives any extension or variation notices to the tenant if the need arises.
Rent relief is permitted up until the end of the 2020/2021 financial year. If, however, economic conditions revert to normal before then, the rent must be adjusted back to the previous level in the lease.
An SMSF trustee must review the fund’s investment strategy annually, and more frequently if conditions warrant it. A major economic downturn such as this requires a review of the fund’s investment strategy. If the fund is substantially invested in ASX-listed shares, the trustee should discuss with their broker or financial advisor now what strategies are appropriate to manage the market fall. Any significant change in approach should be recorded as an amendment to the fund’s investment strategy.
If the financial advice is: “Don’t sell in a down market”, the trustee should still record in a minute that it has reviewed the fund’s investment strategy based on financial advice, and particular investments, and determined that no change is required. Even if the plan is to hold all current assets for the foreseeable future, the investment mix may have changed due to different asset classes being affected differently. In that case a change in strategy may be required to ensure existing asset holdings remain within the strategy.
In this regard, trustees should bear in mind the pre-corona ATO pronouncement that the “traditional” investment strategy of 0-100% cash, 0-100% property and 0-100% shares is not appropriate. Corona has not changed that, as far as ATO has stated at this stage.
For fund assets for which there is no liquid market, such as property, it may be acceptable for the trustee to wait several more weeks, to try to gain a better appreciation of when this economic downturn may start to reverse, before reviewing the investment strategy.
In-house asset rules
SMSFs are permitted to hold in-house assets (loans to and investments in related parties) provided that their market value does not exceed 5% of the market value of the fund’s assets as a whole (in-house asset ratio or IHAR). Ongoing, major market fluctuations may cause a fund to breach the IHAR. The SIS Act states that if the IHAR is breached (provided the trustee did not deliberately cause that result) the trustee must prepare and implement a plan to return the fund to compliance by the end of the next financial year.
ATO has stated that if a fund is in breach of the IHAR at 30 June 2020 it must still prepare a rectification plan. It does not matter whether the breach was caused by corona or not. Compliance action will not be taken, however, if the plan cannot be executed because the market has not recovered by 30 June 2021 or if it is unnecessary to implement the plan if the market recovers. This is still rather vague, and the ATO is expected to issue further clarification over that period.
We can assist your clients with any lease variation or other documentation you may require to address these and other SMSF issues. Please contact email@example.com or firstname.lastname@example.org.