Dealing with the reporting of rental deferrals
SMSF professionals may interpret and apply the reporting requirements of rent deferral differently and the ATO may therefore need to provide clarification on this issue.
The financial impact of COVID-19, resulted in some SMSFs having to provide temporary rent reductions, waivers or rent deferrals to tenants. Where SMSFs have invested in commercial properties rented to related parties, a Code of Conduct has been issued by the National Cabinet which provides trustees with a basis to ensure that the relief is calculated on an arm’s length basis. The parties to the rental agreement are required to document the rent relief and the reasons for the relief in a renewed lease agreement and the deferred amounts must be spread over the remaining lease term or 24 months.
The ATO has provided guidance which requires rent deferral to be reported on the Statement of Financial Position as a “loan receivable”. The loan or rent receivable reported on the balance sheet from a related party will be an In-House Asset for the Fund. However, the ATO have provided compliance concessions, stating that they will generally not take compliance action in relation to potential breaches associated with the rent relief granted under the COVID-19-related measures.
SMSFs are treated as non-reporting entities and therefore the trustees prepare the financial statements in according with the accounting policies as described in the notes of the financial report. Currently, the accounting policy from the SMSF software providers read “Rental revenue arising from operating leases on investment properties is recognised upon receipt”, or “Rent from investment properties is recognised by the Fund on a cash receipt basis.” This means a SMSF would recognise and declare rental income as assessable income when it is actually received by the Fund. Therefore, under tax basis of accounting, rent deferral can only be treated as an “off balance sheet” item and not be reflected in the SMSF’s statement of financial position. Consequently, the Fund will never end up recording an In-house Asset for the rent deferral.
On the flip side, there is no prohibition on related party tenants claiming a deduction for the rent paid and deferred in their business tax returns. However, under the current reporting framework included in the basis of preparation, the SMSF will not report a loan receivable on the balance sheet which will not result in an In-house Asset and consequently there will be no qualification from the auditor and no need for a contravention. The ATO will have no basis to undertake any compliance action for an item that is not reported in the SMSF financial statements or tax returns on cessation of the ensuing 24 months moratorium for SMSF’s that may want to circumnavigate the requirements.
SMSF professionals may interpret and apply the reporting requirements of rent deferral differently and therefore it would be great to get some ATO clarification on the above issue.
Naz Randeria, managing director, Reliance Auditing Services