COVID-19 Relief for SMSFs Extended
Due to the ongoing economic impacts of COVID-19 on large parts of Australia, the ATO has announced the extension of various COVID-19 relief measures for trustees of self managed superannuation funds (SMSFs). The relief previously only applied to the 2019–2020 and 2020–2021 financial years, but will now also be available for the 2021–2022 financial year.
SMSF residency test
To be a complying super fund and receive tax concessions, SMSFs must be an “Australian super fund” at all times during the year. This requires, among other things, for the central management and control of the SMSF (ie individual trustees, or directors of a corporate trustee) to ordinarily be in Australia. Under the relief, a fund will still meet this requirement even if its central management and control is temporarily outside of Australia for up to two years.
Obviously, with the Australian borders pretty much closed during the entirety of the pandemic, and many other countries imposing travel bans, some individual trustees or directors of a corporate trustee may be stranded in another country over the two-year limit through no fault of their own. In these situations, provided there are no other changes in the SMSF or in the circumstances of the individual trustee (or directors of the corporate trustee) affecting other residency conditions, the ATO has indicated it will not apply compliance resources to determine whether a fund meets the residency test.
If an SMSF or a related party has continued to provide rental relief based on the current market conditions, whether it be a rental reduction, waiver or deferral to a tenant, the ATO will provide relief in the form of not taking any compliance action against the fund. However, this is predicated on the rental relief being offered on commercial terms, and there being proper documentation with regards to the arrangement.
The ATO notes that not taking compliance action is only an interim measure. In due course it will be making a formal determination, similar to the one made in 2020, to ensure that rental deferrals offered by SMSFs or related parties to their tenants does not cause a loan or an investment to be an in-house asset in the current and future financial years.
Loan repayment relief
For loan repayment relief provided by an SMSF to a related or unrelated party due to the financial impacts of COVID-19, where the relief is offered on commercial terms and the changes to the loan agreement are properly documented, the ATO will provide relief on similar terms as the interim rental relief – that is, it will not take any compliance action against the fund. This will also apply to limited recourse borrowing arrangements (LRBAs).
Where an SMSF exceeds the 5% in-house asset threshold at 30 June 2021 due to the financial impacts of COVID-19, trustees must still prepare a written plan to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022. However, the ATO has said it will not take any compliance action where the plan has not been executed by the due date (30 June 2022) as a result of the market not having recovered, or in some cases the plan may be unnecessary owing to the recovery of the market.
The ATO has also confirmed that its penalty and interest relief for excessive PAYG variations applies to SMSFs that continue to be impacted by COVID-19 during 2021–2022. The ATO will not apply penalties or interest for excessive variations of PAYG instalments during the 2021–2022 income year, provided that the taxpayer has taken reasonable care to estimate their end-of-year tax.
This ATO concession for penalties and interest applies to 30 June ordinary balancers for the 2021–2022 income year and entities that have been granted a substituted accounting period (SAP). For an entity with a SAP, any variation must relate to instalments made during the 2021–2022 income year.
A PAYG instalment variation requires a reasonable and genuine attempt to determine the liability. When considering if a genuine attempt has been made, the ATO takes into account what a reasonable person would have done in the taxpayer’s circumstances.
The ATO notes that PAYG variations do not carry over into the new income year. Therefore, if a taxpayer made variations in the 2020–2021 income year, they may need to vary again in 2021–2022. The varied amount or rate then applies for all of the taxpayer’s remaining instalments for the income year, or until they make another variation.
The ATO encourages PAYG instalment payers to review their tax position regularly and vary the PAYG instalments as their situation changes. Taxpayers who realise they have made a mistake working out their PAYG instalment can correct it by lodging a revised activity statement or varying a subsequent instalment.
If a taxpayer is unable to pay an instalment amount, the ATO requires them to still lodge an instalment notice and discuss a payment arrangement with the ATO so that they don’t have a debt at the end of the year.
The ATO has also extended to 2021–2022 its existing COVID-19 relief in the Addendum to the Auditor/actuary contravention report (ACR). The ACR relief for 2021–2022 will apply for:
- rental relief (including rental reductions, waivers and deferrals);
- loan repayment relief (including for LRBAs); and
- in-house assets.
Approved SMSF auditors need to refer to the Addendum when determining whether a contravention arises because of the relief, when to report a contravention to the ATO via an ACR for the 2021–2022 financial year, and what evidence to obtain from the trustees to support the relief. In summary, SMSF auditors need to check that:
- rental relief is offered on commercial terms due to the financial impacts of COVID-19 (having regard to relevant state and territory COVID-19 support measures) and the arrangement is appropriately documented;
- loan repayment relief is offered on commercial terms due to the financial impacts of COVID-19 (having regard to the terms of relief offered by commercial lenders), and the changes to the loan agreement are properly documented;
- funds that exceeded the 5% in-house asset threshold at 30 June 2021 due to the financial impacts of COVID-19 have prepared a written plan to reduce the market value of the fund’s in-house assets to below 5% by 30 June 2022.
The ATO has said that SMSF auditors need to use their professional judgment when determining whether relief is offered on commercial terms due to the financial effects of COVID-19. If there is insufficient appropriate evidence to support the relief, including that it is offered on commercial terms, SMSF auditors should report this via an ACR where the reporting criteria are met.
Audit opinion modifications
The existing ACR Addendum notes that auditors may still need to modify their opinion in Part B of the audit report where they identify any material breach of the provisions and regulations listed within the audit report, even if those breaches have arisen from the impacts of COVID-19 in circumstances where the ATO will not be taking compliance action against them. Even where a modification is not necessary, for example because the auditor forms an opinion that the contravention is not material, the auditor must still notify the trustee of these contraventions. This could be done in the management letter to the trustee.
The ATO also recommends that auditors add to the management letter that the ATO will not be taking any compliance action against these contraventions for the 2019–2020, 2020–2021 and 2021–2022 financial years. All other contraventions identified in the fund need to be reported to the trustee in the management letter and reported to the ATO in the ACR where the reporting criteria are met.
Arm’s length terms must be documented
The ATO relief generally only applies where a landlord has “acted in good faith” and agreed that the tenant can defer payment of rent on arm’s length terms during one or all of the 2019–2020, 2020–2021 and 2021–2022 income years in order to ease the financial hardship caused by COVID-19.
The National Cabinet Mandatory Code of Conduct (or any relevant state-based codes or legislation) may assist in assessing whether the rental deferral has been negotiated in good faith and on arm’s length terms.
There must also be contemporaneous documentation reflecting the arm’s length terms and that the lease remains enforceable. Any deferred amounts must also be repaid by the tenant as soon as practicable.
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.