Where an SMSF holds an investment property and the tenant’s ability to pay rent is affected by COVID-19, the fund needs to bear in mind not only the requirements of the superannuation law, but also the National Cabinet Mandatory Code of Conduct (the Code of Conduct) in relation to commercial leases, and the NSW State Government’s recent restrictions on landlords seeking to evict residential tenants for non-payment of rent.
The Code of Conduct is mandatory where a commercial tenant (including retail, office and industrial) has an annual turnover of up to $50m, and is an eligible business for the purpose of the Jobkeeper programme (whether or not it actually applies for Jobkeeper). The two most important aspects of the Code of Conduct are: (1) landlords must not terminate leases due to non-payment of rent “during the COVID-19 pandemic period (or a reasonable subsequent recovery period)”, and (2) landlords must offer tenants reductions in rent payable in the form of waivers and deferrals, which are proportionate to the reduction in the tenant’s trade, during that period. At least 50% of the total reduction in rent payable must be in the form of rent waivers. For more information on The Code of Conduct please view our recent article.
In relation to residential tenants, in NSW the Residential Tenancies Regulation has been amended with effect from 15 April to (1) prevent a landlord from giving a tenant notice of termination, or applying to the Civil and Administrative Tribunal for an eviction order, on the basis of unpaid rent, for 60 days where the tenant is affected by the COVID-19 pandemic, and (2) prohibit a landlord from such action for 6 months, unless the landlord has participated in good faith in a formal rent negotiation process with the tenant and it is fair and reasonable in the circumstances of the case for the landlord to give the notice or apply for the order. For more information on NSW Rent Relief measures please view our recent article.
This is a very brief summary of both provisions, and we would be pleased to provide more detailed advice if you believe your SMSF may be affected.
Both the Code of Conduct and the Residential Tenancy amendments provide concessions for the tenant at the expense of the landlord. This could place a fund in a difficult situation, especially if the investment is the subject of a limited recourse borrowing arrangement with an arm’s-length financial institution such as a bank. The position of both Federal and State Governments appears to be that landlords should negotiate with their lenders, but there is no guarantee that lenders will be accommodating.
On a positive note, the NSW Government has announced a 25% reduction in 2020 land tax where the land is used for business or residential purposes, the tenant can demonstrate at least a 30% drop in revenue (for a business tenant with a turnover of up to $50m) or at least a 25% drop in family income (for a residential tenant), and the landlord passes the land tax saving onto the tenant in the form of reduced rent. The details of how to apply for this concession are yet to be announced.
In terms of superannuation law, clients must still ensure that they comply with the following, especially in the case of tenants who are related parties of an SMSF (such as family members or businesses owned by members of the fund):
- the sole purpose test – the fund trustee should act in accordance with what an arm’s-length landlord would do. An arm’s-length landlord may grant a concession to an unrelated tenant whether is in the landlord’s best interest, and may indeed be forced to grant a concession under the Code of Conduct or the Residential Tenancy amendments above.
- the in-house asset test – non-payment of rent by a related party tenant may give rise to a loan by the SMSF to the tenant, which may result in a contravention if the loan exceeds 5% of the total value of fund assets.
- the prohibition against lending or providing financial assistance to a member or relative – this could be breached if the tenant is a member or relative of a member, and the arrangement is not on arm’s-length commercial terms.
- the arm’s-length test – all investments and transactions involving the SMSF must be made and maintained on an arm’s-length basis.
Although the ATO has announced a compliance approach for the 2020 and 2021 financial years whereby they will not take action where an SMSF gives a related party tenant a temporary reduction in rent during the COVID-19 period, it is still important for clients to carefully document the reasons for such decisions and have regard to what an arm’s-length landlord would do in such circumstances. We would be pleased to provide further advice if desired.
