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There are two situations outlined in the draft guidance and
both are explicitly linked to rent adjustments made as a result of Covid-19:
Scenario 1: An SMSF landlord allows a related party tenant to defer rent, or
Scenario 2: An SMSF owns units in a unit trust or shares in a company that is a related party (because, say, the fund or the members’ family group controls the entity). However, it is exempt from being an in-house asset because the investment complies with SIS Regulation 13.22B or 13.22C. The company or trust owns property and allows a tenant to defer rent.
In both cases, it is still vital that the rent relief is provided on arm’s length terms and the documentation of the relief is critical here in supporting that position.
Rent relief during the pandemic is likely to include both rent waivers (where the rent is never paid) and rent deferrals (where the rent is paid eventually just not right now). So why does SPR 2020/D2 only deal with rent deferrals? It’s because these arguably constitute a loan – the superannuation fund (or 13.22C trust or company) is owed rent, and the tenant has been permitted to delay paying it, possibly for some time. Since the definition of loan for superannuation purposes is very wide and includes the provision of credit or any other form of financial accommodation, a deferral of rent will often fall into this definition.
Scenario 1 is specifically limited to SMSF landlords who lease property to related party tenants. That is because loans to other tenants (not related parties) are not in-house assets in any case – no special legislative instrument is required to exclude them.
Scenario 2 (where the SMSF is investing in a trust or company and it is the trust or company that is providing a rent deferral to a tenant) applies regardless of whether or not the tenant is a related party. This is necessary because these trusts are generally not allowed to make loans to anyone – related party or not. Any loan would normally taint the entire trust or company forever. The in-house asset would not just be the value of the loan (ie the deferred rent owing to the trust or company); it would be the SMSF’s entire investment in the trust or company.
The draft covers rent deferrals that occur in 2019/20 and 2020/21 only. Presumably, it may be extended in the future if the pandemic continues at a level where rent is still being deferred in 2021/22 etc. Note that it does not require the deferred rent (effectively the loan amount) to be repaid in full by 30 June 2021 – the wording of the guidance simply requires that 2019/20 and 2020/21 are the years in which rent was deferred. In the case of 13.22C unit trusts, the guidance would allow the trust to remain classified as a 13.22C trust indefinitely as long as the only threat to its classification is a rent deferral provided in 2019/20 and 2020/21.
Why aren’t pre-99 unit trusts or unit trusts that are do not comply with SIS Regulation 13.22C mentioned? In short, because they don’t need to be. These trusts can make loans to other entities, including related parties. As always, it is important to deal with related parties on an arm’s length basis, but the existence of a loan is not problematic in and of itself.
How can the ATO do this? The SIS Act gives the Regulator (so, for SMSFs, the ATO) very broad powers when it comes to in-house assets.
In fact, the ATO has the power to say:
- An investment that, strictly speaking, doesn’t meet the definition of an in-house asset should nonetheless be treated as if it is (SIS s.71(4)); and
- The exact opposite – an investment that would normally be an in-house asset can be treated as if it is not (SIS s.71(1)(f)).
The second power is not used particularly often but has been very useful here!