ATO releases additional guidance on reporting contraventions

“These instructions are contained in the addendum to the Auditor’s contravention report (ACR) and provide guidance around how auditors can determine whether a fund has complied with the super laws and when contraventions should be reported to us,” the Tax Office said.

The addendum to the ACR instructions covers five areas of relief including providing rental relief, loan repayment relief, in-house asset relief, market valuations and early release of super on compassionate grounds due to COVID-19.

The ATO said additional instructions have also been included in the Part B Compliance engagement section of the SMSF Independent auditor’s report (IAR) to reflect the ACR instructions.

“The instructions advise auditors they do not need to modify their opinion in Part B of the report where certain material contraventions have arisen due to COVID-19 relief specific to the 2019–20 and 2020–21 financial years,” it said.

Rental relief

As previously outlined by the ATO, the instructions stated that where SMSF trustees provide their tenants relief due to the financial effects of COVID-19 and the rental relief satisfies the requirements of being on commercial terms and is appropriately documented, a section 109 contravention will not arise.

Some of the key requirements when dealing with tenants affected by COVID-19, the ATO said, include the tenant self-assessing whether they have been adversely impacted and providing a rental tenancy relief request made in writing, ensuring the relief provided is in proportion to the loss of income experienced from the COVID-19 crisis and staying committed to lease terms subject to any amendment.

“The parties may draft an amended lease agreement for rental relief due to COVID-19 for a term of up to six months, consistent with the period allowed by banks for the deferral of loan repayments for small businesses who need assistance because of COVID-1,” the ATO outlined.

“The tenant will need to be current with their rental payments and not in arrears as of 1 January 2020, consistent with banking requirements in relation to loan repayment relief.”

The ATO also noted that rental relief arrangements should be comparable with other similar lease agreements and in line with COVID-19 market conditions.

Loan payment relief

Where a licensed financial institution such as one of the major banks offers loan repayment relief to an SMSF in respect of an LRBA, the ATO said it is clear the arrangement would be considered to be on an arm’s-length basis.

“However, this is less clear where a related party offers an SMSF this type of relief. In this situation, it is possible a section 109 contravention may arise if the relief has not been offered on arm’s-length terms. The non-arm’s length income (NALI) rules might also apply,” it explained.

“If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, we will accept the parties are dealing at arm’s length. Therefore, there is no contravention of section 109 of SISA and the NALI provisions do not apply.”

The Tax Office stated that the parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue and is capitalised on the loan.

“Any further relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time,” it said.

“When applying the loan concessions on the ABA’s banking website to determine whether loan repayment relief is commercial, you should ensure the trustee/s used the terms that were in place at the time the loan repayment relief was provided in case there are any amendments to these terms over the course of time.”

In-house asset relief

While the ATO previously stated it would not be take compliance action against SMSFs who have exceeded the 5 per cent in-house asset threshold due to market conditions, the instructions clarify that auditors will not need to report these contraventions for the 2019–20 and 2020–21 financial years.

Due to the impacts of COVID-19 and the downturn in the market, we understand it might be difficult for funds who had exceeded the 5 per cent in-house asset threshold at 30 June 2019, to now execute a plan to dispose of the excess by 30 June 2020.

“While funds who exceeded their in-house asset threshold as at 30 June 2019 must still prepare a plan to dispose of the excess, we will not take compliance action against the fund where the trustee is unable to execute the plan and rectify the in-house asset breach by 30 June 2020 due to the impacts of COVID-19,” the instructions stated.

“This means you will not need to report in-house asset contraventions in the 2019–20 ACR, where the in-house asset position is impacted by the effects of COVID-19.”

If the trustee finds that they exceed the 5 per cent in-house asset threshold as at 30 June 2020 for the first time, the ATO said a plan must still be prepared on or before 30 June 2021.

“However, we will continue not to undertake compliance activity if the rectification plan was unable to be executed because the market has not recovered by 30 June 2021 or it was unnecessary to implement the plan as the market had recovered,” the instructions stated.

“This means you will also not need to report these types of in-house asset contraventions to us in the 2020–21 ACR.”

Market valuations

While there is no change to reporting requirements of regulation 8.02B, the ATO acknowledged that some trustees may experience difficulties due to the impacts of COVID-19 in obtaining objective evidence to support the valuation of assets as per the requirement in the SMSF valuation guidelines.

“If this is the case, you should provide reasons in the ACR as to why the trustee was unable to obtain the appropriate evidence, and if we are satisfied this was due to the impacts of COVID-19, the contravention will not result in any penalties,” it stated.

“Instead the trustee will receive a letter from us advising them to ensure they comply with our valuation guidelines and have supporting valuation evidence by the time of their next audit if possible, as repeated contraventions can lead to penalties.”

Early release of super due to COVID-19

For SMSFs who have accessed up to $10,000 of their superannuation to deal with the adverse effects from the coronavirus, it is important auditors ensure the member has not illegally early accessed their benefits.

“This means checking that the trustee has a determination from the commissioner confirming the member is eligible for early release of super and having regard to any provisions in the trust deed constraining such payments,” it stated.

“You will not be expected to check that the member has met the eligibility requirements listed under regulation 6.19B of the SISR. However, if you suspect or find out during the audit that the member did not meet the eligibility requirements, you can report this information at Section G ‘Other Regulatory Information’ of the ACR.”

The ATO also made clear that it expects auditors to report a regulation 6.17 contravention where the amount subject to the determination has been released prior to the trustee receiving a copy of the determination, if that contravention meets the reporting criteria.

“Where a member has received the determination, they may decide to no longer pursue release of the benefits or may wish to release a smaller amount than the amount stipulated in the determination. While this constitutes a breach of the payment standards, you are not required to report a contravention of regulation 6.17 in these circumstances,” it stated.

The instructions also stated that if a trustees releases the amount stipulated in the determination in multiple lump sums, this would amount to a breach of regulation 6.17 as a result of the cashing restrictions in item 107A of the table in Schedule 1 of the SISR.

“These require that the amount specified in the determination is to be released in one single lump sum not exceeding the amount specified in the determination. This breach will need to be reported where the reporting criteria is met,” it stated.