Shunning rent relief for tenants could have NALI risks

The law firm said that while the ATO’s approach may please SMSF trustees and professionals, this temporary and general compliance approach should not be mistaken as “a perfect cure to any potential compliance breaches”.

“There has been no formal change in the requirements as provided in the superannuation and tax legislation relevant to an SMSF providing rent relief, meaning the ATO’s FAQ section is certainly not an excuse for trustees to deviate from their ongoing responsibilities and obligations under the existing superannuation and tax laws,” it said.

The example of Bruce and Linda

Townsends uses the example of Bruce and Linda, who are members/directors of the corporate trustee of the B & L SMSF.

The fund owns a commercial warehouse that is rented to Bruce and Linda’s business. Due to COVID-19 economic stress, their business income has been significantly reduced when compared to the same period in the previous year.

The business is a small- to medium-sized business with annual turnover less than $50 million and is eligible for the JobKeeper payment. Bruce and Linda aren’t considering giving any rent relief to their business and so are effectively pumping up their super instead.

According to Townsends, the ATO’s temporary compliance approach regarding rent relief does not cover Bruce and Linda’s situation where a fund has not provided rent relief to a related-party tenant who suffered financial distress as a result of COVID-19.

But had the same lease been given to an unrelated tenant, the law firm said it is likely that the net rental income earned by the fund from the lease would have been lower for the income year due to rent relief negotiation between the parties in accordance with the applicable government measures, including the national cabinet’s mandatory code of conduct.

“On this basis, the Tax Office could arguably assess the rental income from the property for the current income year as NALI to be taxed at 45 per cent,” it said.

According to Townsends, the NALI risk could be mitigated if Bruce and Linda took their member/trustees’ hats off and conducted themselves as if their business was an arm’s-length tenant unrelated to the fund.

“The ATO’s announcement of temporary compliance approach is not in the form of a binding advice and also doesn’t cover all circumstances,” the law firm said.

“For prudent trustees, this message from the regulator should be conceived as ‘we trust you will do the right thing during this period’ rather than ‘you can ignore the compliance rules during this period’.”