SMSF in-house asset exemption due to COVID-19

To prevent SMSFs falling afoul of the in-house asset provisions when they give related party tenants a rent deferral due of financial hardship caused by COVID-19, the ATO has released a draft legislative instrument to provide a SMSF in-house asset exemption. The instrument proposes to provide an in-house asset exemption for an asset that is attributable to the deferral of rental income measures implemented to provide COVID-19 financial relief.

SMSFs using this exemption may be required to keep documentation to ensure that the parties continue to deal with each other on an arm’s length basis.

With many landlords around Australia doing their bit to help businesses by deferring rent during the ongoing pandemic, SMSFs that own property assets are no doubt also doing their part. However, trustees that defer rental income under an arm’s length lease to related parties may fall afoul of in-house asset rules. To prevent that outcome, the ATO has released a draft legislative instrument proposing to provide an in-house asset exemption for an asset that is attributable to the deferral of rental income measures implemented to provide financial relief as a result of COVID-19.

The instrument ensures that a SMSF asset will not be considered to be an in-house asset where the SMSF during the 2019-20 and 2020-21 financial years either:

  • allows a related party tenant a deferral of rental income under a lease (on arm’s length terms) due to the financial impacts of COVID-19; or
  • holds an interest in a related party which is exempt from being an in-house asset due to the operation of certain relations and that related party allows a tenant a deferral of rental income under a lease (on arm’s length terms) due to the financial impacts of COVID-19.

Under the current rules, where an SMSF trustee offers a deferral of rental income under a lease directly to a related party tenant, the deferral can constitute a loan to the related party. This is because under the relevant legislation, the definition of a “loan” includes the provision of credit or any other form of financial accommodation, whether or not enforceable or intended to be enforceable by legal proceedings (eg financial arrangements deferring the payment of an amount). These loans are considered to be in-house assets.

This means that where an SMSF trustee accepts a request for a deferral of rental income under a lease directly from a related party, the deferral results in the trustee acquiring an in-house asset that is not covered by any of the exemptions in current legislation. When the value of an SMSF’s in-house asset investments exceeds 5% of the total value of its assets, the SMSF trustee is required to prepare an implement a written plan to dispose of the excess by the end of the following year of income.

The SMSF also cannot acquire further in-house assets and there are penalties for not complying with the in-house asset provisions.

Due to the likelihood of many SMSFs inadvertently breaching the in-house asset rules during the pandemic, the ATO said the Commissioner believes it is appropriate to exercise his powers to exclude the SMSF’s investment from being an in-house asset where the deferral of rental income Is provided during the 2019-20 and 2020-21 financial years, and only those years. It also means that SMSF auditors will not be required to report a contravention to the ATO or advise the trustees of the contraventions which would otherwise result for those years.

However, according to the ATO, the exclusion will only apply to situations where the SMSF trustee or interposed entity has acted in good faith and as a result of the financial impacts of COVID-19 has offered the tenant a deferral of rental income in order to ease financial hardship. It notes there should be contemporaneous documentation drafted reflecting the revised rental terms agreed to by the SMSF trustee and the tenant to ensure the parties continue to deal with each other at arm’s length and the lease remains enforceable.

SMSF in-house asset exemption due to COVID-19, need help?

If you are an SMSF trustee and are not sure whether you are meeting all your obligations, including the complex in-house asset provisions, we can help. If you’ve given your related party tenant a deferral of rent and are not sure whether the potential exemption would apply to you, contact us today.

Hunter Partners are Accountants, Tax Agents and Financial Planners. We can assist you with all aspect of your accounting, tax and financial planning requirements, call Hunter Partners on (07) 4723-1223.