ATO, Documentation, Tax

Expand in-house asset relief to more entities

in-house asset relief

The ATO should expand the number of entities within an SMSF that are able to claim in-house asset relief related to COVID-19 rent relief.

ATO measures to prevent rent relief, provided by an SMSF with an interest in an interposed entity, from being treated as an in-house asset need to be expanded to include a wider definition of those entities, according to an SMSF legal expert.

DBA Lawyers principal Dan Butler said typically where property is held within an SMSF through an interposed entity, such as a non-geared unit trust or company, and any form of rent relief is applied, such as a deferral or waiver, a loan to the fund would be created, as would a subsequent a breach of Division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Speaking during a recent webinar, Butler said the “ATO has seen need to come to the party and overlooked that issue” and published a draft legislative instrument – SPR 2020/D2 on 3 August 2020 to address the matter.

According to Butler the instrument stated where an SMSF holds an interest in an interposed entity that leases property to a tenant, any investment in that entity would not be treated as an in-house asset (IHA) for the 2020 and 2021 financial years where COVID-19 rent relief was provided.

Despite this, he said the instrument was limited and pointed out a fact sheet released earlier in the year, and prior to SPR 2020/D2, did not put a limit on the financial years for which the deferred rent would not be considered an IHA.

“This is interesting because under Division 13.3A, the provisions are that a non-geared unit trust must comply year after year, that is, there is continuous testing, and if the trust contravenes one of the provisions, such as taking on a loan to a related party, that would taint the units and once tainted they are forever tainted and treated as an IHA,” he said.

“It should refer to the 2020 financial year and all future financial years for interposed entities, as it did in the fact sheet, but currently the draft only refers to the 2020 and 2021 financial years.”

He said DBA Lawyers had raised this issue with the ATO and also pointed out the definition of interposed entity needed to be expanded.

“We noted that where SPR 2020/D2 refers to an interposed entity it should include a non-geared unit trust or a non‐geared company under SISR 13.22B, 13.22C or 13.22D, but also cover a related trust or company that may be a pre‐99 unit trust or company,” he said.

“We have included the term ‘related trust’ because it has a different definition to ‘related party’ in section 10 of the Superannuation Industry (Supervision) (SIS) Act

“A related trust can hold more than 50 per cent, can have significant influence, or have control for hiring and firing the trustee, which are three tests that are different to a related party.

“What the ATO is doing is making a class of assets which is not an IHA under section 71 of the SIS Act where it can declare by legislative instrument that an asset will not be an IHA of any fund. That is what they are doing with this SPR, which constitutes a legislative instrument and hopefully it will be reissued soon with this expansion.”

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