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Sladen Snippet - ATO releases draft legislative instrument to deal with in-house asset issues for SMSFs offering rent deferrals to related party tenants

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The Australian Taxation Office (ATO) has released a welcome draft legislative instrument, Self Managed Superannuation Funds (COVID-19 Rental income deferrals - In-house Asset Exclusion) Determination 2020 (SPR 2020/D2), that will exclude COVID-19 related rental deferrals from being ‘loans’ under the in-house asset rules.

Earlier this year, we discussed the ATO’s compliance approach where a self managed superannuation fund (SMSF) trustee provides a tenant – including a related party – with a temporary rent reduction, waiver or deferral because of the financial effects of COVID-19. We also noted some of the potential issues which rent relief may cause for SMSF trustees, including breaches of the prohibition against providing financial accommodation (section 65 of the Superannuation Industry (Supervision) Act 1993 (SIS Act)) and the in-house asset rules (Part 8 of the SIS Act).

For example, due to the extended definition of a ‘loan’ under section 10(1) of the SIS Act, a rent deferral could be considered the provision of financial accommodation by an SMSF to a related party tenant. The ATO has previously confirmed in SMSFR 2009/4 its view that rent deferrals can, in substance, be financing arrangements that amount to financial accommodation. Under the ATO’s view, this would mean that a deferral of rental under a lease (even if it is on arm’s length terms) from an SMSF landlord to a related tenant would be a “loan” to a related party, which would constitute an in-house asset.

Likewise, where the SMSF holds an interest in a related unit trust or company that is exempt from being an in-house asset due to the operation of regulation 13.22B or regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (Reg 13.22 Entity), a rent reduction, waiver or deferral to a related party tenant could cause the interest held by the SMSF in the Reg 13.22 Entity to be in-house assets.

To address these issues, SPR 2020/D2 proposes to exclude as an in-house asset during 2019-20 and 2020-21 financial years:

  • a deferral of rent under a lease (on arm's length terms) from an SMSF trustee to a related tenant due to the financial impacts of COVID-19, or

  • interests in a Reg 13.22 Entity, where that entity allows a tenant a deferral of rent under a lease (on arm's length terms) due to the financial impacts of COVID-19.

While SPR 2020/D2 is a welcome measure, it does not address rent reductions and waivers, especially in a Reg 13.22 Entity context. It also reinforces that care is required before an SMSF trustee grants or receives any concessions during the COVID-19 pandemic to ensure that such concessions don’t result in the SMSF trustee inadvertently breaching the superannuation or tax laws.

To discuss further or for more information please contact:

Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801   
E  pbroderick@sladen.com.au 

Phil Broderick