The COVID-19 pandemic has caused an immense amount of financial stress on tenants, especially commercial tenants who have suffered a severe downturn in their businesses. As a result, many commercial tenants are approaching their landlords demanding a rent reduction and variation to their lease.
Landlords may be willing, and in certain cases they may be required, to negotiate temporary rent relief in the form of a waiver and/or deferral of rent. However, if the landlord is an SMSF trustee and the tenant is a related party, non-compliance with superannuation legislation could give rise to extra costs and potential exposure to substantial penalties.
Issues that an SMSF renting to a related party needs to consider
Before entering into a rent variation agreement, it is essential that each SMSF landlord carefully considers, among a range of other issues, the following:
- Applicable legislation of the relevant state or territory regulating the landlord and tenant, including any special provisions for rental properties relating to COVID-19 of the relevant state or territory. Refer to the related articles below for some state and territory links.
- Compliance with the National Cabinet Mandatory Code of Conduct — SME Commercial Leasing Principals During COVID-19 (‘Code’). Broadly, the Code contains the Federal Governments good faith principles applicable to negotiating variations to a lease where a tenant is adversely impacted by COVID-19. For more information, please click here.
- The applicable provisions in the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’), eg, the prohibition against providing financial assistance to a member or relative (s 65 of SISA), the in-house asset rules (pt 8 of SISA) and the arm’s length test (s 109 of SISA). For more information about maintaining SISA compliance while providing rent relief, please click here.
- In cases where the SMSF has borrowed from a related party using a limited recourse borrowing arrangement (‘LRBA’) to acquire the property, unless the arrangement is maintained in accordance with the ATO’s safe harbor criteria in PCG 2016/5 or is otherwise maintained on an arm’s length basis, the fund may be taxed at 45% as the ATO may seek to apply the non-arm’s length income provisions in s 295-550 of the Income Tax Assessment Act 1997 (Cth). We offer a separate service for altering the terms of an LRBA. For more information, please click here.
DBA Lawyers can help
We can assist SMSF trustees, tenants and their advisers navigate the legal, tax and commercial issues including:
- Providing guidance and advice on the available options and the best way to proceed to document a variation.
- Undertake appropriate due diligence on relevant matters to ensure the key issues have been considered to minimise the risk of subsequent queries arising from SMSF auditors (giving rise to an auditor contravention report or an ATO audit).
- ‘Stress test’ any evidence for arm’s length (benchmark) testing and prepare appropriate documents to provide the evidence including relevant trustee resolutions.
- Once the terms and conditions of any lease variation are agreed upon, we can assist with obtaining a variation to a lease. You may want to instruct us to work with your existing property/leasing lawyer or real estate agent. Note that any legal work should only be undertaken by a qualified lawyer.
- We can also review any lease variation or related documents to ensure compliance with superannuation and tax law and provide any written advice that is needed that will be subject to legal professional privilege.
If you wish to proceed, please complete the SMSF Lease Review Service order form (click here) and return it together with the documents requested therein. Alternatively, please contact us if you would prefer to discuss how we may assist.
Once we confirm your needs and the background details including current documentation, we can provide a fee proposal for your prior approval.
DBA Lawyers is well placed to work with you and/or your advisers to tailor an optimal solution during these difficult times.
For more information:
Federal, State and Territory government information:
- The Code
- Victoria Supporting Tenants And Landlords Through Coronavirus
- NSW Government – Fair Trading Renting FAQs
- Queensland Government – The Residential Rental Hub (COVID-19)
- SA Government – Rental advice due to COVID-19
- WA Government – New laws to provide support for commercial and residential tenants and landlords
- Tasmanian Government – Residential tenancy changes (COVID-19)
- ACT Government – Information for tenants and landlords (Fact Sheets)
- NT Government – COVID-19
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
18 April 2020