There’s no doubt that the COVID-19 pandemic has caused great upheaval to our businesses, the economy and life as we once knew it. We are beginning to emerge out the other side, with States and Territories relaxing restrictions in a staged approach. As our lives start returning to some type of ‘new normal’, it’s important to realise that many things won’t be exactly the same as they were before. For those people who have a Self-Managed Superannuation Fund (SMSF), depending on the fund circumstances this may extend to the annual audit. In this article, we look at one of the changes coming out of COVID-19 – related party commercial property tenancies.

The Federal Government’s recommendation for tenancies impacted by COVID-19 was for the parties to mutually address the issue. The “Mandatory Code of Conduct for SME Commercial Leasing Principles During COVID-19” was intended as both a safety net and a starting point for those discussions. The Code applies to commercial tenancies that are eligible for the JobKeeper program. In the SMSF environment, this relates to small businesses that experienced a reduction in turnover of at least 30 per cent due to COVID-19. The principles of the Code are requirements for any SMSF related-party tenant that qualifies for the JobKeeper program. For these severely impacted businesses, the code is a mandatory standard of arm’s-length dealing.

Golden rules for the SMSF landlord

1. 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.
2. A freeze upon all rent increases may apply until the economic situation improves.
3. Where possible, reduce any unnecessary burden for the tenant.

Golden rule for the related party commercial tenant – there is only one!

1. Stick to the lease terms, including any specific amendments relating to COVID-19. If the tenant fails the lease conditions, the arrangement may be considered to be not at arm’s length (this is a problem for a fund’s compliance with the superannuation laws).

What is the ATO’s approach going to be?

This is an interesting one, and you would be forgiven for being a bit confused by what you might have seen reported in the media. In the SMSF space, while the ATO have said that they will not “devote compliance resources” to this area for the 2020 and 2021 financial years, it does NOT mean that there is an open book for related party tenants to do whatever takes their fancy. A lesser-known fact is that the ATO has made it clear to SMSF auditors that there is still an obligation to report breaches of the laws. What this means in practice is that the audit reporting procedures basically won’t change – so depending on the circumstances, audit reports on compliance with the superannuation laws could still be “qualified” where problems are identified. Auditor reporting directly to the ATO (via auditors’ contravention reports) might also be required, depending on the existing reporting thresholds set by the regulator.

What DOES change is that where the breaches are a result of COVID-19, the ATO will not take the matter any further for audits relating to these two financial years.

So what are SMSF auditors required to do for 2020 and 2021 audits?

1. Form an opinion as to the commerciality of a post-COVID-19-related tenancy – noting that per the Code, the goal posts of commerciality have shifted.
2. Request sufficient appropriate audit evidence from SMSF trustees to support this opinion. This may include:
   • evidence of tenant eligibility for JobKeeper;
   • evidence of decline in projected turnover;
   • written correspondence between tenant and landlord with requests for proportionate reduction in rent;
   • changes to lease terms compliant with the principles of the Mandatory Code; and
   • evidence that there is a trigger point for a return to ‘normal’ commercial dealings.
3. If the tenancy is not conducted on commercial terms, recognise a contravention of the arm’s length dealing rules and communicate this to the trustees in the audit management letter.
4. If the contravention of the arm’s length rule is considered material, qualify the compliance audit report (this formally identifies the non-compliance).
5. If the contravention is reportable under the regulator’s reporting criteria, report the contravention (and any other contraventions) as usual to the ATO.

This sounds complex!

Yes it is (well, possibly). So how did we get here? The circumstances that have arisen in 2020 were unforeseen. The superannuation laws were enacted in 1993, and were not drafted to work in the current environment. An unfortunate outcome is that SMSF trustees may find themselves in a situation where there have been unavoidable breaches of other superannuation rules. For example, extending rent relief to a related-party tenant may also be considered to break the rule that prohibits fund trustees from providing indirect financial assistance to members or their relatives.

So all things considered, it seems that the ATO is making an effort to adopt a common-sense approach, within the guidance of a broader framework. The collateral damage includes the time and effort in gathering the appropriate evidence to make the SMSF audit process as smooth as possible.

Importantly, it’s always worth raising questions with your adviser if you have any doubts.