Can I Stop Paying My SMSF Rent?

Superannuation

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DATE PUBLISHED: March 31, 2020

COVID-19 BUSINESS STRESS

COVID-19 is placing stresses on many businesses, particularly from a cash flow perspective. Where the business premises are owned by the client’s superannuation fund it can be tempting for clients to grant themselves rent relief by either deferring or waiving rent for a period of time. But will this cause issues for the self managed superannuation fund (SMSF)?


THE RULES

Like many of life’s other great mysteries, the answer depends on the particular circumstances. Of the rules which apply to an SMSF, those that are most relevant here are:

  • The requirement, when investing with others who are not dealing at arm’s length, that arrangements must be no more favourable to the other party than if everyone was dealing at arm’s length.[1] At first blush, if rent is reduced or waived, the tenant is treated more favourably than an arm’s length tenant;
  • The prohibition against providing financial assistance to members or relatives of members using the resources of the fund.[2] If the lease is directly to a member or relative who operates the business, or the member or relative directly or indirectly benefits from the entity that operates the business, it would appear that reducing or waiving rent may amount to financial assistance. Even if the lease was not directly to a member or relative, there may still be financial assistance indirectly where a member or relative is an owner or beneficiary of the leasing entity (e.g. it is the client’s company or family trust);
  • The obligation that the fund be maintained for one or more core purposes (as well as possibly one or more ancillary purposes).[3] Reducing or waiving rent might indicate that the fund is maintained for another purpose (e.g. to allow the business to trade).


CAN RENT RELIEF BE PROVIDED WITHOUT BREACHING THE RULES?

In practical terms, whether rent relief offered by the SMSF will trigger any of the issues above largely comes down to whether the arrangements reflect arm’s length arrangements. It would be reasonable to expect in the current environment that arm’s length tenants will be asking for rent relief where their businesses are under stress. If there are prospective tenants in the marketplace ready to pay full rent, then giving relief to the current tenant is unlikely to be appropriate. If on the other hand there is stress in the rental market place it may be that no tenant could be found to replace existing tenant if the lease were enforced. On the basis that the SMSF would enter into a similar arrangement with an arm’s length tenant, it could be reasonable to give relief in order to retain an otherwise good tenant, rather than lose the tenant and be left either with a vacant property or an undesirable tenant.

If your clients are considering giving relief, ideally they should obtain extrinsic evidence that the relief being considered is consistent with what is being offered elsewhere in the marketplace. This could be as simple as a letter from or a file note of a phone call with a local real estate agent where that agent confirms the availability (or otherwise) of other tenants, and the typical rental relief being offered in the market.

The ATO has also indicated that its compliance approach for the 2019–20 and 2020–21 financial years is that they will not take action where an SMSF gives a tenant who is also a related party a temporary rent reduction during this period.


[1] Section 109 Superannuation Industry (Supervision) Act 1993 (SIS)

[2] Section 65 SIS

[3] Section 62 SIS

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