SMSF landlords: ATO guidance on temporary COVID-19 rent reduction

Last week, we wrote an article about the compliance hurdles faced by an SMSF if they wanted to provide rent relief to tenants – click here to read the previous alert.

The ATO has since announced some guidance for SMSF landlords – click here for the ATO’s guidance.

ATO’s position

The ATO have confirmed that SMSFs can provide ‘a temporary rent reduction’ to tenants, including a tenant:

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

Although this would normally trigger a range of SIS Act compliance breaches, the ATO has indicated that it will not take compliance action for either the 2020 or 2021 financial years.

As a result, an SMSF can provide a temporary rent reduction immediately without fear of the ATO taking adverse action.

Are there any requirements to access the ATO’s concession?

The concession provided by the ATO is extremely broad, partly because its guidance statement is very brief and as the full extent of this crisis is still unknown. The only requirement of the ATO’s concession is that the rent reduction must be temporary.

There are no other limitations on how an SMSF provides rent reduction. In particular, an SMSF can determine:

• the amount of rent reduction provided
• how long to provide the rent reduction for (although the ATO are currently only applying their no compliance approach for the 2020 and 2021 financial years).

Given the current business challenges, the ATO’s position is that there is no need for the rent reduction provided to be justified by market evidence (the SMSF can determine the reduction in its absolute discretion).

The ATO’s concession does not apply to any other lease incentives or relief – just a ‘temporary rent reduction’.

What should SMSFs do?

Although the rent reduction concession provided by the ATO is extremely broad, it is important that it is not abused (otherwise the ATO may not be so generous next time).

SMSF landlords should provide rent reduction to tenants who are suffering the effects of the COVID-19 crisis. This rent reduction should be reasonable and measured to the COVID-19 impact suffered by the tenant. Best practice is that it is consistent with the approach taken by arm’s length landlords.

The rent reduction agreed to by the SMSF should be properly documented, as this is an amendment to the lease terms.

It is likely that SMSF auditors will be required to report any rent reductions, although the exact parameters of what will be reported in relation any rent reductions are still being determined.

Congratulations to the ATO for providing such a useful concession to help SMSFs and their tenants deal with the COVID-19 crisis.

Please contact a member of our specialist SMSF team if you need assistance.