Could rent deferrals cause in-house asset issues for SMSFs?

4 May 2020

Lyn Formica

Head of SMSF Technical & Education Services

My client’s SMSF owns business real property which it leases to a related party. The related party tenant has been adversely financially impacted by COVID-19 and the fund trustee intends to agree to the tenant’s request for temporary rent relief on the basis that it is needed so the tenant can manage their cash flow. The trustee plans to base their relief on the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principles but I’m worried providing a rent deferral (as distinct from a rent waiver) could cause in-house asset issues for the fund. Am I right?

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Yes, but the ATO has offered compliance concessions.

Let me explain. 

Many SMSF trustees will use the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principles as a guide for determining how much temporary rent relief should be provided (ie how much is necessary and therefore commercial – an essential requirement when dealing with related parties) and the form that relief should take.

The Code provides that relief can take two forms - a rent waiver and a rent deferral.

A rent waiver, which would usually make up at least 50% of the total rent relief, cannot be recouped by the landlord over the lease term. It is simply a rent free period and lost revenue for the fund.

In contrast, a rent deferral means the amount due is still owed and must be paid by the tenant to the SMSF (usually over the remaining term of the lease or at least 24 months whichever is greater).

However, under the extended definition of a “loan” in the Superannuation Industry (Supervision) Act, a rent deferral could be considered the “provision of financial accommodation” and therefore a loan to the tenant (and therefore an in-house asset if the tenant was a related party). SMSFs are not prohibited from having in-house assets but their level must not exceed 5% of the fund’s total assets.

Fortunately, whilst the ATO agrees that a rent deferral could amount to a loan to the tenant, they have indicated they will generally not take compliance action in relation to this and the other potential breaches associated with the provision of COVID-19 related necessary but temporary rent relief. Further, SMSF auditors will not be required to report these breaches in an Auditor Contravention Report provided they are satisfied that the relief offered by the trustee is on commercial terms.

Another welcome and pragmatic solution provided by the ATO.


Where to find further information?

Stay up to date on COVID-19 superannuation related issues and access the latest support with our COVID-19 Resources pack. Available now as part of the Heffron Super Companion.