Landlords are providing rent relief and other incentives to help tenants deal with COVID-19.
If your landlord is an SMSF, can they do this?
We have sourced the following article for our SMSF landlords
from Cooper Grace Lawyers (https://www.cgw.com.au/publication/smsf-landlords-can-you-agree-to-covid-19-rent-relief/)
What if the landlord is an SMSF?
We have received a lot of enquiries about
whether an SMSF can provide rent relief (or other incentives) to tenants of a
property owned by the SMSF in order to assist them with the impacts of
COVID-19.
Where the tenant has no connection (direct or
indirect) to the SMSF landlord, there is unlikely to be SIS Act complexities.
However, offering rent relief (or other incentives) is fraught with SIS Act
compliance risks where:
·
the tenant is a
related party or related trust
·
a member, relative or
a member or related party/trust has an underlying economic interest in the
tenant.
SIS Act compliance issues
An SMSF that provides rent relief (or other
incentives), risks breaching a number of SIS Act compliance provisions,
including the following:
·
Sole purpose test – as
the reason for offering the rent relief (or other incentive) could be viewed as
to assist the tenant, not increasing the retirement benefits of the SMSF
members.
·
Financial assistance –
as the rent relief (or other incentive) will provide a financial benefit to the
member or relative personally (either directly or indirectly) outside the SMSF.
·
Arm’s length dealing –
as it could be difficult to establish the SMSF is dealing with the tenant in
the same manner as they would an unconnected tenant
A 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. This is the case even if this would
have a detrimental impact on the tenant or the members (personally).
Standard provisions in leases regarding the
ability to amend the lease term and charging interest on rent shortfalls, will
not help the SMSF overcome the potential SIS Act compliance consequences.
SMSFs providing rent relief to tenants
In our view, it will be possible for an SMSF
to provide rent relief (or other incentives) provided the SMSF can establish it
is in the best interests of the SMSF.
What exactly is required to establish this
(and provide the best chance of fending off the ATO) will depend on:
·
the circumstances of
each SMSF
·
the circumstances of
each tenant, including its cashflow, operations and the restrictions imposed by
COVID-19
·
the terms of the
existing lease
·
the property the
subject of the lease, including its location and the ability for it to be
leased to another tenant
·
comparative rent
relief (and other incentives) being offered by arm’s length landlords.
Because of the seriousness of the SIS Act
compliance risks, obtaining sufficient evidence to justify the rent relief (or
other incentive) will be vital. It will also be time-consuming and require
detailed analysis and justification.
It is also essential the new arrangement is
properly documented.
If rent relief (or other incentive) is
provided without obtaining sufficient evidence or properly documenting the
arrangement, there is a high risk of the ATO taking adverse action against the
SMSF, such as administrative penalties of up to $12,600 per breach per trustee
or non-compliance.
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.
See our article: What landlords must know when their tenant
gives them notice to vacate: https://www.realrenta.com.au/blog/post/628
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Jason Gwerder
Sunday, 29 March 2020
