SMSF landlords: can you agree to COVID-19 rent relief?

Landlords are providing rent relief and other incentives to help tenants deal with COVID-19. If your landlord is an SMSF, can they do this?

What if the landlord is an SMSF?

We have received a lot of enquiries about whether an SMSF can provide rent relief (or other incentives) to tenants of a property owned by the SMSF in order to assist them with the impacts of COVID-19.

Where the tenant has no connection (direct or indirect) to the SMSF landlord, there is unlikely to be SIS Act complexities. However, offering rent relief (or other incentives) is fraught with SIS Act compliance risks where:

• the tenant is a related party or related trust
• a member, relative or a member or related party/trust has an underlying economic interest in the tenant.

SIS Act compliance issues

An SMSF that provides rent relief (or other incentives), risks breaching a number of SIS Act compliance provisions, including the following:

• Sole purpose test – as the reason for offering the rent relief (or other incentive) could be viewed as to assist the tenant, not increasing the retirement benefits of the SMSF members.
• Financial assistance – as the rent relief (or other incentive) will provide a financial benefit to the member or relative personally (either directly or indirectly) outside the SMSF.
• Arm’s length dealing – as it could be difficult to establish the SMSF is dealing with the tenant in the same manner as they would an unconnected tenant

A strict interpretation of these rules requires the SMSF to enforce the terms of an existing lease, including taking all necessary steps to collect the full rent payable, potentially down to taking possession or enforcement action. This is the case even if this would have a detrimental impact on the tenant or the members (personally).

Standard provisions in leases regarding the ability to amend the lease term and charging interest on rent shortfalls, will not help the SMSF overcome the potential SIS Act compliance consequences.

SMSFs providing rent relief to tenants

In our view, it will be possible for an SMSF to provide rent relief (or other incentives) provided the SMSF can establish it is in the best interests of the SMSF.

What exactly is required to establish this (and provide the best chance of fending off the ATO) will depend on:

• the circumstances of each SMSF
• the circumstances of each tenant, including its cashflow, operations and the restrictions imposed by COVID-19
• the terms of the existing lease
• the property the subject of the lease, including its location and the ability for it to be leased to another tenant
• comparative rent relief (and other incentives) being offered by arm’s length landlords.

Because of the seriousness of the SIS Act compliance risks, obtaining sufficient evidence to justify the rent relief (or other incentive) will be vital. It will also be time-consuming and require detailed analysis and justification.

It is also essential the new arrangement is properly documented.

Risks of non-compliance

If rent relief (or other incentive) is provided without obtaining sufficient evidence or properly documenting the arrangement, there is a high risk of the ATO taking adverse action against the SMSF, such as administrative penalties of up to $12,600 per breach per trustee or non-compliance.

It is critical that rent relief (or other incentive) is not provided by an SMSF without them first obtaining proper advice in relation to the SIS Act compliance consequences.

The specialists at CGW can assist with providing advice on navigating the SIS Act compliance requirement in order for an SMSF to provide rent relief (or other incentives), and assist with properly documenting the rent relief arrangements and lease amendments.