Lease payments to your Self-Managed Super Fund during Covid-19
The Federal Government has announced a moratorium on evictions for commercial tenants and a mandatory code for landlords and tenants. However, how to handle leases and rents is a little more complicated in the situation where a Self-Managed Super Fund (SMSF) is a landlord of commercial property. Making the wrong decision as a Landlord or even as a tenant when a SMSF is involved could lead to unintended consequences like being taxed at a much higher rate.
To understand this conundrum, it is worth keeping in mind the legal status of a SMSF. A SMSF, like all super funds, is a trust. The trust is its own legal entity with control of the trust being in the hands of the trustees (and technically speaking the appointor of the trust but that is a conversation for another day). Most SMSF’s will have a company as its trustee – so you might have the AAA Family Self-Managed Super Fund, of which the trustee is a company AAA Pty Ltd. The Company will have directors who make the decisions for the company, which in turns means they are making the decisions of the trustee.
Sometimes, there will be some connection between the trustees and the assets of the super fund. For example, the premises that are leased may be leased as the business premises of a business conducted in another entity by the directors. If your business or another related party leases property from your SMSF and you are thinking about forgiving rent payments, deferring rent or reducing payments, you need to consider the following:
Any arrangements made need to be reflective of an “arms length” transaction and in the best interest of the fund. To be “arms length” the arrangement should reflect the true market conditions and value; the kind of arrangement relating to rent that would be negotiated between a landlord and tenant that do not have the close personal relationship that you and your SMSF have. For example, simply forgiving rent for 6 months is unlikely to be reflective of an arms length arrangement.
A rent deferral or rent forgiveness might be considered an “in house asset”, so may take you over the yearly in house asset limit of 5% of your total SMSF assets. Deferring or forgiving payment of a debt is a kind of “in house asset” because it is considered a loan from your SMSF.
While the ATO has stated that its “compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action where an SMSF gives a tenant — who is also a related party — a temporary rent reduction during this period.” The key appears to be the word temporary. That said, this advice from the ATO is not binding and so it is not clear how the current situation will dealt with by the ATO without more specific guidance. In the interim, I suggest caution.
Therefore, if you are dealing with property owned in a SMSF it is important to get a sound combination of legal and accounting advice before reducing or deferring rent payments.
OFRM business lawyers Lachlan Edwards or Siobhan Liston and can help you understanding your SMSF’s legal obligations. Contact Lachlan on 0427 916 442 or Siobhan on 03 5445 1067 for assistance.