SMSFs impacted by COVID-19 due to the extended lockdowns in certain States and Territories will be granted extended relief to cover the 2021/22 financial year.
The relief was originally offered by the ATO to SMSFs for the 2019/20 and 2020/21 financial years where certain situations may have caused SMSF trustees to contravene superannuation law.
For example, a SMSF trustee may have provided or accepted certain types of relief, such as giving a tenant/s (including a related party tenant) a reduction in rent if they were financially impacted due to COVID-19. As charging a price that is less than market value will usually give rise to contraventions under the superannuation laws, the relief measures will avoid this outcome if the arrangement meets certain criteria (ie. the relief is offered on commercial terms and the arrangement is documented, etc).
The relief measures available
The ATO has extended the following types of relief to SMSF trustees for 2021/22:
- SMSF residency relief – if a trustee is stranded overseas due to COVID-19 and they are out of Australia for more than two years, the SMSF will still be treated as an Australian superannuation fund. As the COVID-19 health crisis has resulted in many countries imposing travel bans and restrictions around international travel, the ATO will not apply compliance resources to determine whether the SMSF meets the relevant residency conditions.
- Temporary rental relief – the ATO will not take compliance action where an SMSF landlord (or a related non-geared company or unit trust) provides rental relief to a tenant in the form of a reduction, waiver or deferral. This is provided that the relief is offered on commercial terms (having regard to State and Territory COVID-19 support measures) due to COVID-19, and the arrangement is properly documented. The ATO has stated it will also provide an in-house asset exemption for such rental deferrals by making a determination for 2021/22 (similar to the 2020 determination).
- Loan repayment relief – the ATO will not take compliance action where loan repayment relief is provided by an SMSF to a related or unrelated party due to COVID-19. The relief must be offered on commercial terms with the changes to the loan agreement properly documented.
- Limited recourse borrowing arrangements (LRBA) – if an SMSF has an LRBA in place with a related party and the lender offers loan repayment relief to the fund, the ATO will accept the parties are dealing with each other at arm’s length, and the arrangement does not give rise to non-arm’s length income (NALI). However, the relief must be offered on commercial terms (having regard to the terms of relief offered by commercial lenders for real estate investment loans) and the loan agreement is properly documented.
- In-house assets – if an SMSF exceeded the 5% in-house asset threshold at 30 June 2021 due to COVID-19, a rectification plan must be prepared to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022. However, the ATO will not undertake compliance activity if the rectification plan cannot be executed by 30 June 2022 because the market has not recovered or it is unnecessary to implement the plan as the market had recovered.
What actions are needed
SMSF trustees must ensure they properly document the relief and can provide their approved SMSF auditor with evidence to support it for the purposes of the annual SMSF audit.
When documenting any changes, providing the reasons for change will assist the SMSF auditor when they use their judgement when determining whether relief is offered on commercial terms due to the financial effects of COVID-19.
It is also good practice to document any changes by way of a minute or a renewed lease agreement or other documentation.
The Addendum to the auditor/actuary contravention report instructions, which already applies to the 2019/20 and 2020/21 financial years, has been updated to also cover the 2021/22 financial year. Thus, approved SMSF auditors will need to refer to the Addendum when determining whether a contravention arises for an SMSF because of the relief.
