Head of Education & Content
On 22 March 2020 we released our blogs covering the superannuation related issues from the Government’s second stimulus/support package. Since then, new issues have emerged with the early release from super rules and the ATO has made announcements regarding SMSFs leasing assets to related parties but to date there’s not been any guidance on limited recourse borrowing arrangements.
Early Release from Super
The ATO is anticipating up to 3 million requests will be made for release of super benefits under the new “compassionate ground – coronavirus” once applications open on 20 April 2020.
Unfortunately we’ve discovered a common misunderstanding amongst individuals and their advisers. Most focus simply on the eligibility rules. Namely, that the individual must:
- be unemployed, or
- eligible to receive a Job Seeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance, or
- on or after 1 January 2020:
- have been made redundant, or
- had their working hours reduced by 20% or more (including to zero), or
- for sole traders, their business was suspended or there was a reduction in their turnover of 20% or more.
However, there is a more fundamental test to be satisfied first – an implied “purpose test”. In our view, the released monies must be needed to assist the individual deal with the adverse economic effects of Covid-19.
We expect individuals will be asked to confirm that as part of the application process. Accessing super benefits without satisfying this purpose test could result in the benefit paid being treated as an illegal early access payment with significant tax consequences.
We’ve also discovered a number of scenarios in which it would appear that individuals are not eligible for the new rules despite their income being reduced as a result of the adverse economic effects of Covid-19. For example:
- Employees who have not been made redundant but have had their pay reduced do not appear to be eligible as their working hours have not reduced.
- Individuals who operate a business through a company or trust structure are also not able to access the new rules without a reduction in their working hours. The turnover of the business only appears to be taken into account for sole traders, not companies or trusts.
It is not clear whether this is an intended outcome or an oversight but we’ve raised our concerns with Treasury.
SMSFs Leasing Assets to Related Parties
Many businesses have been forced to close their doors during the Covid-19 crisis, and their income has stopped overnight. Already we are seeing many cases of businesses negotiating with their landlords to either:
- not pay any rent for a period of time, or
- defer payment of rent for a period of time (with the arrears to be paid when the business recovers), or
- reduce the rent payable.
When an SMSF owns the business premises and the lease is with a related party, extra care must be taken to ensure that the SMSF complies with all of the superannuation laws before allowing the related party tenant to stop, reduce or defer their rental payments.
This would normally entail the SMSF trustee obtaining external evidence from say a local real estate agent of the current market conditions and the approach taken by third party landlords.
Fortunately the ATO has recognized the exceptional nature of the current situation and announced they will not take compliance action in the 2019/20 and 2020/21 years where temporary rent reductions are offered to related party tenants.
Importantly, this does not mean that the ATO suddenly views commercial behaviour between SMSFs and related parties as unimportant. Nor is it an open invitation to put in place arrangements that are clearly not warranted. In our view, what the ATO is signalling is that given the current situation is so profoundly economically damaging for many businesses, they are happy for auditors to demand a lower standard of specific evidence that a particular arrangement is commercial. Instead, they will rely on the obvious evidence at a national level that some form of rent relaxation is normal, commercial and expected between any landlord and a tenant affected by Covid-19.
We understand the ATO are currently working through what their concession will mean for auditors and expect further information will be provided in due course.
Related Party Limited Recourse Borrowing Arrangements
Where rent relief is provided in respect of a property owned via an LRBA, there is an added layer of complexity if the SMSF is then unable to meet its monthly loan repayments. If the related party lender were to offer the SMSF a freeze on principal repayments, the fund would no longer satisfy the safe harbour rules of PCG 2016/5.
Of course, straying outside the safety of PCG 2016/5 doesn’t mean the income from the arrangement is instantly considered non-arm’s length income. Rather the fund trustee could instead obtain sufficient evidence that the terms of their arrangement were still commercial. For example, by benchmarking the loan relief offered to the fund with that being offered by commercial lenders.
Given the ATO concession on related party rents, it is hoped that concessions will also be offered in relation to LRBAs and the requirements of PCG 2016/5 to avoid these additional compliance costs.
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.