In a contributed blog, Peak Super Audits managing director Naomi Kewley said that while the ATO will not be taking compliance action in the area of rent relief for the 2019–20 and 2020–21 financial years, fund administrators must keep section 109 of the Superannuation Industry (Supervision) Act 1993 in the forefront of their minds or “risk a reluctant collision with their SMSF auditor”.
Small businesses that have experienced a reduction in turnover of 30 per cent or more due to COVID-19 are eligible for the government’s JobKeeper program.
Further, businesses with reduced turnover of 30 per cent or more are covered under the government’s mandatory code for rent relief, something which Ms Kewley said is “intended to work both as a safety net and as a starting point for these discussions”.
Golden rules for landlords and commercial tenants with less than 30% downturn
However, Ms Kewley said commercial tenants suffering less than 30 per cent downturn are not covered under the mandatory code.
But she added that this does not mean that these commercial tenants cannot reach an arm’s-length agreement with their landlord for the reduction of rent.
While the code is not directly applicable for related-party tenants suffering a downturn of less than 30 per cent, Ms Kewley said the code provides a good yardstick for the new normal in commercial practice.
She stated three golden rules for the SMSF landlord:
- Reduction in rent must be proportionate to the negative impact of COVID-19 upon the business and may take the form of a rent waiver.
- A freeze upon all rent increases may apply until the economic situation improves.
- Where possible, reduce any unnecessary burden for the tenant.
“Are there overheads that no longer have utility? Don’t charge the tenant and, if possible, switch off the service altogether,” Ms Kewley said.
As for related-party commercial tenants, Ms Kewley stated one golden rule:
- Stick to the lease, including any specific amendments relating to COVID-19.
“If the tenant fails the lease conditions, the arrangement may be considered non-arm’s length and in breach of section 109,” Ms Kewley said.
“This is important. It bears repeating. The tenant has one job: ensure compliance with the lease.”
What auditors will need to see?
Ms Kewley said auditors will need to see evidence that the tenant has been negatively affected by COVID-19, and should take the form of a letter from the related-party tenant addressed to the SMSF trustees, describing the negative impact of COVID-19 upon the business.
“As with applications for the JobKeeper payment, you must substantiate the estimated reduction in turnover and then retain this evidence. The letter should formally request a reduction in rent proportionate to the virus’s financial impact upon the business,” Ms Kewley said.
“The SMSF trustee should reply to this letter, confirming their acceptance of the new lease terms. A series of emails may take the place of letter writing, if convenient.”
Ms Kewley said auditors will also need to see a current executed lease agreement, together with any amendments contained in an addendum to the lease.
“The lease arrangement should reflect with the golden rules outlined above and must be complied with as though it were an arm’s-length commercial arrangement,” she said.
