SMSF trustees seeking relief due to COVID-19 will need to adhere to revised directives specific to the 2019-20 and 2020-21 financial years.

The Australian Taxation Office (ATO) has issued additional instructions which provide guidance on how auditors can determine whether a fund has complied with the superannuation laws and when the contraventions should be reported to the ATO.

The addition to the instructions covers the five areas of relief: providing rental relief, loan repayment relief, in-house asset relief, market valuations, and early release of superannuation on compassionate grounds due to COVID-19.

Here’s what you need to know:

Providing rental relief

SMSF trustees who are landlords are giving tenants rent relief, waiver, or deferral due to COVID-19. The fund will not contravene S62 or S109 provided that:

A) The relief is on commercial terms

• The rent relief provided by the trustee is in line with rental relief provided by other landlords to unrelated tenants in similar circumstances
• The tenant will need to self-assess whether they have been adversely impacted and the request be made in writing
• Rent relief should be provided in proportion to the loss of income the tenant has endured
• The tenant should stay committed to the lease terms and the parties may draft up an amended lease agreement for rental relief for a term of up to 6 months consistent with the period allowed by banks for loan payment deferrals
• The tenant needs to be current with their rent payments and not in arrears as at 01/01/2020.

B) Rent relief must be as a result of COVID-19

• There must be evidence that the tenant has been impacted. For example, via registration or monthly declaration for the JobKeeper scheme.

 C) Documentation must be put in place to reflect the arrangement

• Temporary changes to lease terms need to be documented, as well as the reason for the change. A minute reflecting this signed by both the trustee and tenant will be sufficient
• The parties must adhere to the revised terms
• Will the tenant still be in the property after the rent relief period ends or evicted?

Related entities

• If the fund holds an interest in a related party exempt from an in-house asset under DIV13.3A and leases property to a tenant offering rent deferral, the ATO will not take compliance action if:
  • The relief provided is on commercial terms
  • The relief has been provided as a result of COVID-19
  • The arrangement is adequately documented.

Rent reductions and minimum pension requirements

If an SMSF provides a tenant with rent relief due to COVID-19, and this results in cashflow problems for the fund, where it cannot meet the minimum pension for the year, relief is not available. If this occurs, there are two options:

• The fund could sell assets to free up cashflow
• Consider temporary borrowing 90 days and not more than 10 per cent of funds’ assets.

Under recent changes to superannuation, the government is allowing a temporary reduction in the minimum pension amount by 50 per cent for the 2019/20 and 2020/21 years.

Loan repayment relief

Financial institutions and related parties are offering loan payment reliefs on LRBA arrangements, or the SMSF may offer loan repayment relief to a loan made to a related or unrelated party impacted by COVID-19.

Related party providing relief

If the banks offer relief regarding an LRBA, it’s clear the arrangement is arms-length. However, with a related party, possible breaches of S109 should occur as the arrangement may not be at arms-length and the NALI rules may also apply.

Key points

• Provided that the related party offers the terms similar to the banks, then no contravention of S109 will occur
• As long as the trustee can provide evidence of loan payment relief replicating what commercial banks are offering at the time, they accept the relief, then the parties are dealing at arms-length
• The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed. There is also an expectation that evidence is provided to prove that interest continues to accrue and is capitalised on the loan. Any further relief at the end of the term should be reviewed again and documented.

The banks are offering:

• interest and principal repayments on the loan can be suspended for up to six months
• interest will continue to accrue on the loan during the deferral period
• accrued interest is to be capitalised and form part of the amount to be repaid over the term of the loan
• the borrower must have been financially impacted by COVID-19
• the borrower must not terminate a lease or evict a tenant for rent arrears during the loan.

SMSF trustee providing loan payment relief

If an SMSF has loaned money to an unrelated party or related party that does not breach the IHA rules:

• The loan repayment musty be on commercial terms
• The loan repayment deferral must be documented (minute will suffice)
• The financial impact of COVID-19 must be appropriately explained and documented.

In-house asset relief

A requirement under the IHA rules is that a S82 plan is prepared and executed by the following year if the value of the funds IHA exceeds 5 per cent of the fund’s total assets at June 30.

Funds that exceeded their in-house asset threshold as at June 30, 2019 must still prepare a plan to dispose of the excess, but the ATO will not  take compliance action against the fund where the trustee is unable to execute the plan and rectify the in-house asset breach by June 30, 2020 due to the impacts of COVID-19.

If the trustee finds that they exceed the 5 per cent in-house asset threshold as at June 30, 2020 for the first time, a plan must still be prepared on or before June 30, 2021.

On the other hand, the ATO will continue not to carry out compliance activity if the rectification plan was unable to be fulfilled because the market has not recovered by June 30, 2021 or it was redundant to execute the plan as the market had recovered.

Market valuations

Trustees may find it difficult to obtain non-qualified objective evidence of valuations due to COVID-19.

If this happens, reasons for not being able to obtain the evidence must be provided in the ACR.

If the ATO believes that those reasons are due to COVID-19, then no contravention will occur, and the trustees will only receive a letter from the ATO to comply with the valuation guidelines by the time of the next audit.

Property

Given COVID-19, we need to look closer at the market values for property and whether they are at market value. With the economic uncertainty in our economy, the markets have become unpredictable.

Given this, it can be argued that valuations provided as evidence in prior years are no longer sufficient or appropriate audit evidence and it’s time for revised valuations. But it can be difficult to rely on these because they will most likely be heavily disclaimed.

Clarify the following questions:

• Can we rely on what the trustee have provided?
• What effect does rent relief have on value and how?
• When rent relief ends will the tenant still be in the property or evicted?

Unlisted units and shares

Consider if the underlying investment is property or business.

If the auditor cannot establish that the MV of the underlying investment is satisfactory then qualify Part A & B in the audit report and lodge an ACR where required.

Note that Reg 8:02B is a reportable contravention.

Early release of superannuation on compassionate grounds

To deal with the economic impacts of COVID-19, the ATO permitted the superannuation early access scheme.

From April 20, 2020, eligible SMSF members could access up to $10,000 of their superannuation before July 1, 2020 as up to a further $10,000 from July 1, 2020 until September 24, 2020.

In forming an opinion on whether the fund has complied with the payment standards in regulation 6.17 of the SISR with regards to this new compassionate condition of release, SMSF auditors need to ensure the member has not illegally early accessed their benefits.

Full details on the requirements for reporting this information are available on the ATO’s website.

Need help navigating the changes? Speak to LDB’s SMSF and audit experts

If you’re unsure about any of these additional instructions on reporting conventions, LDB’s experienced team of SMSF and audit experts can help.

Simply give us a call on (03) 9875 2900 or submit an enquiry via the contact form below.