SMSFs planning on providing tenants with COVID-19 rent relief should be aware the measures may not apply to business real property leased via non-geared unit trusts, also known as 13.22c trusts, and should await clarification from the ATO, according to an SMSF technical manager.
SuperConcepts SMSF technical services – executive manager Mark Ellem said the recently announced rent relief measure appears to only apply where a property, that is leased to a related party, is owned directly by an SMSF.
In a column published on the SuperConcepts website, Ellem noted that’ based on the ATO’s comments’ the rent relief would not apply to property held in a non-geared unit trust as it was not the SMSF that would be providing any rent reduction but rather the trustee of the unit trust.
“Further, a non-geared unit trust is exempt from the in-house asset rules provided it complies with SIS (Superannuation Industry (Supervision)) regulation 13.22C and more importantly, doesn’t have what is known as a Superannuation Industry (Supervision) Regulations (SISR) 13.22D event. If such an event occurs, then the non-geared unit trust is forever tainted and treated as in in-house asset and subject to the 5 per cent limit.”
He said there were two potential 13.22D events that could result in a non-geared unit trust being tainted and thus not exempt from the in-house asset rule.
The first of those is under section 13.22D(1)(b)(ii) of the regulations which states the property would no longer be considered an non in-house asset, that is in keeping with section 13.22c, if the unit trust takes on a loan to another entity, except where the loan is a deposit with an authorised deposit-taking institution .
The second event is under section 13.22D(1)(l) which states the property would no longer be considered an non in-house asset if the trustee of the unit trust, conducts a transaction otherwise than on an arm’s length basis.
The consequence of these events, according to Ellem, is in the first instance “the unpaid rent could be seen as a loan from the unit trust to the related party” and in the second “the temporary reduction in rent would need to be substantiated as being on an arm’s length basis”.
He said this disparity between the treatment of property held within SMSFs should be addressed as the financial difficulties resulting from COVID-19 were not limited to one set of property owners.
“The financial effect of the COVID-19 pandemic applies equally to SMSFs owning property directly and those SMSFs owning indirectly via a 13.22C unit trust.
“It would be welcomed if the ATO could clarify whether the temporary rent reduction would not be treated as a 13.22D event.
