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Retirement

SMSF-owned property and the provision of rent relief

  • March 27 2020
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Retirement

SMSF-owned property and the provision of rent relief

By Grace Ormsby
March 27 2020

As Australian families and businesses begin to feel the strain of the economic downturn and are turning to their landlords for rental relief, the landlords of SMSF-owned property need to be careful.

rent relief

SMSF-owned property and the provision of rent relief

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  • March 27 2020
  • Share

As Australian families and businesses begin to feel the strain of the economic downturn and are turning to their landlords for rental relief, the landlords of SMSF-owned property need to be careful.

rent relief

Acknowledging it has received a large number of requests for information around the legality of SMSFs providing tenants rental relief, law firm Cooper Grace Ward has released an article on the topic: “SMSF landlords: Can you agree to COVID-19 rent relief?”

Here are some of the key takeaways:

Can an SMSF-owned property provide rent relief?

According to Cooper Grace Ward partner Clinton Jackson, the firm’s view is that it will be possible for an SMSF to provide rent relief, or other incentives, provided that the SMSF can establish it is in the best interests of the SMSF.

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What is required to establish this “best interests” duty, and provide the best chance of fending off the Australian Taxation Office, will depend on a number of factors, Mr Jackson said.

These include the circumstances of each SMSF; the circumstances of each tenant, including its cash flow, operations and restrictions imposed by COVID-19; terms of the existing lease; the property that is the subject of each lease, including the ability for it to be leased to another tenant; and comparative rent relief and any other incentives being offered by arm’s-length landlords.

Beware compliance issues

Mr Jackson warned that because of the seriousness of legislative compliance risks, “obtaining sufficient evidence to justify the rent relief (or any other incentive) will be vital”.

Noting it would also be time-consuming and require detailed analysis and justification, the partner emphasised that it is “essential the new arrangement is properly documented”.

Where the tenant has no connection — either directly or indirectly to the SMSF landlord — there are unlikely to be legislative complexities when offering rent relief.

But it’s fraught with potential compliance risks where the tenant is a related party or related trust, or if a member, relative or related party or trust has an underlying economic interest in the tenant.

The lawyer flagged that when an SMSF does provide rent relief, there are a number of ways it may breach compliance provisions, such as:

  • The sole purpose test – as the reason for offering rent relief could be viewed as to assist the tenant, not to increase the retirement benefits of the SMSF member.
  • Arm’s length dealing it could be difficult to establish that the SMSF is dealing with the tenant in the same manner they would an unconnected tenant.
  • Financial assistance due to the relief providing a benefit to a member or relative personally — whether directly or indirectly — outside the SMSF.

Where there is a potential connection, Mr Jackson said the “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”.

He noted this is the case even where it would have a detrimental impact on the tenant or the members.

In addition, the lawyer highlighted that standard lease provisions that do provide an ability to amend lease terms “will not help the SMSF overcome the potential SIS Act compliance consequences”.

Risks and consequences of non-compliance

Mr Jackson said where rent relief is provided without obtaining sufficient evidence or proper documentation, “there is a high risk of the ATO taking adverse action against the SMSF”.

This could include administrative penalties of up to $12,600 per breach per trustee.

“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 partner concluded.

SMSF-owned property and the provision of rent relief
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About the author

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Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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