SMSFs that have offered any form of rent relief under COVID-19 provisions will not be able to rely on informal agreements in recording that relief and may breach in-house asset rules or arm’s-length requirements if they fail to use valid documents, according to an SMSF legal expert.
DBA Lawyers principal Dan Butler said as rent relief measures start to expire in different states around Australia, trustees needed to ensure any rent relief, waivers or alterations on a lease were recorded in valid, legally enforceable documents and not an exchange of letters or trustee resolutions.
Butler noted rent relief measures for commercial tenancies had ended in South Australia and would also come to an end in New South Wales, the Australian Capital Territory, Victoria and Western Australia at the end of March and in Queensland at the end of April under current government plans, but these were actually extensions on previous deadlines.
“The ATO has already said they have concerns that some of these lease arrangements are not properly documented and that will have significant implications in respect to in-house assets and will also have non-arm’s-length income connotations,” he said as part of a webinar late last week.
He added this requirement was reinforced in the ATO-issued QC 17603, which covers auditor contravention reporting related to COVID-19-related rent relief measures.
“This addendum says that if there are temporary changes to the lease in response to COVID-19, it is important that the parties document those changes and their reasons for the change. It is also important to review the lease agreement and this may require a formal variation to be drafted or a renewed lease agreement,” he said.
“Given the numerous extensions of rent relief, have your SMSF clients been updating these lease documents accordingly? Will they satisfy the legally enforceable requirements in order not to be an in-house asset or not to blow up a non-geared unit trust?
“The question you have to look at is – will you have sufficient and appropriate evidence for the SMSF auditor to be satisfied they will not need to do a contravention report?”
Butler, however, warned that any SMSF that had relied on an exchange of letters and resolutions by the trustee was likely to find they were not legally enforceable and could result in non-arm’s-length income risks.
He said the ATO had noted that where any loan payment relief tied to a limited recourse borrowing arrangement (LRBA) was on the same terms as those offered by a commercial lender, it would accept parties were operating at arm’s length and that relief ran until the end of January.
Given no further relief was proposed, he said SMSFs with loans should be considering returning to monthly repayments of principal and interest, in line with Practical Compliance Guideline 2016/5, and it was unlikely formal documents would have considered what happens in the event of a loan default.
“If an SMSF defaults on a payment, the interest goes up generally by 2 per cent, and the lender may bring on a recovery and choose to recover from the guarantor,” he said.
“There may be people with loans and agreements where they might have thought about the deferral but not about the higher interest rates.
“When their auditor takes a look and finds they have taken a deferral and agreed to a higher interest rate where they didn’t pay on time, but that wasn’t dealt with within the variation to loan agreement, they may be up for a contravention report.
“Again I ask, do you think an exchange of letters and a trustee resolution will do the job?
“A lease is a special legal document that is granting a proprietary interest in land, which generally can only be revised by a deed, but a contractual document like a loan can be varied by contractual documentation which satisfies variation provisions within that loan agreement. In this instance, an exchange of letters and trustee resolutions may therefore be effective with varying a loan agreement.”
