Can your SMSF's lease to a related party grant COVID-19 relief and should it be documented?
If an SMSF has entered into a commercial lease with a related party, and the tenant is experiencing hardship with
its repayments as a result of COVID-19, then the SMSF landlord may grant the tenant COVID-19 relief from
Ordinarily, agreeing rent other than on at arm's length terms to a related party tenant would breach super law -
however, for the purposes of COVID-19 relief, it does not. The arrangement needs to be documented for it to be
compliant with super law.
Is an SMSF generally allowed to offer rent relief to a related party tenant? No.
Ordinarily, super law prohibits an SMSF from offering rent that does not reflect arm's length terms, where the
tenant is a related party. Rent will not be at arm's length if the SMSF, for example, sets the rent at below
market rates or provides rent relief or a discount to such a tenant. Accordingly, an SMSF that provides rent
relief to a related party tenant ordinarily risks breaching a number of compliance provisions, including the
- Sole purpose test - offering rent relief to a related party tenant may be viewed as pursuing a
separate purpose of assisting the tenant rather than the sole purpose of providing retirement benefits to
the SMSF's members. This may result in the 'sole purpose test' being contravened.
- Financial assistance - offering rent relief to a related party tenant may be viewed as providing a
financial benefit to a member or a member's relative in a personal capacity (be it directly or indirectly)
as opposed to benefiting the SMSF and its members in their capacity as members of the SMSF. This may result
in the SMSF financially assisting that member or member's relative which is prohibited by super law.
- Arm's length dealing - offering rent relief to a related party tenant may contravene the
prohibition against non-arm's length dealings as it could be difficult for the SMSF to establish that it is
dealing with the related party tenant in the same way that it would otherwise deal with a tenant that is
unrelated to the SMSF.
Is an SMSF allowed to offer rent relief to a related party tenant in response to COVID-19? Yes.
Notwithstanding the general position described above, the ATO has recently acknowledged the hardship that
tenants, including tenants that are related parties of an SMSF, may be facing as a result of the COVID-19
In particular, the ATO has stated on its website
here that its compliance approach for the 2019-20 and 2020-21 financial years is that it will not take
action if an SMSF gives a tenant - even one who is a related party - a temporary rent reduction, waiver or
deferral because of the financial effects of COVID-19 during this period.
Each State / Territory has enacted legislation which governs a tenant's eligibility for COVID-19 rent relief and
each State / Territory has slightly different requirements governing eligibility. The principal requirements in
most States / Territories are that:
- the lease is for retail, commercial or industrial purposes (agricultural or pastoral leases are generally
not covered, and residential leases are in most cases covered by a separate regime);
- the tenant is a participant in the JobKeeper scheme; and
- the tenant has an annual turnover of less than $50 million.
The specific legislative provisions in each State / Territory will need to be considered if there is any doubt as
to whether the statutory entitlement to claim rent relief applies to a particular tenancy.
An SMSF may seek to offer rent relief to a related party tenant if, for example, the related party tenant
operates a business from the leased premises and the business has:
- had to temporarily close as a result of the impacts of COVID-19; or
- seen a substantial reduction in its revenue as a result of the various governmental restrictions imposed
in response to COVID-19.
How should an SMSF document rent relief offered to a related party tenant in response to COVID-19?
If an SMSF seeks to offer rent relief to a related party tenant, it must ensure that the rent relief is:
- temporary in nature;
- directly in response to the financial impact of COVID-19 on its related party tenant; and
- adequately documented.
The ATO has stated, on its website here
- if temporary changes are made to the terms of a lease agreement in response to COVID-19, the parties to
the lease agreement must document the change and the reasons for the change; and
- this may be done by way of minutes or a renewed lease agreement or other contemporaneous document.
To assist with the documentation process, Cleardocs has developed a new product - Cleardocs Rent Relief
Can Cleardocs assist with the required documentation? Yes.
Cleardocs Rent Relief (COVID-19) has been developed in response to COVID-19 and the ATO's statements in relation
to the ability of an SMSF to grant temporary rent relief to related party tenants impacted by COVID-19.
Cleardocs Rent Relief (COVID-19) provides an SMSF with the required documentation which the SMSF will need in
order to continue to comply with super law, if the SMSF intends to provide COVID-19 rent relief to a related
party commercial tenant.
The 'rent relief' offered by the product includes:
- deferral or a partial waiver of outgoings;
- deferral, partial waiver or full waiver of rental payments; and/or
- an extension of the lease term if a deferral of rent is being provided.
What if the SMSF is already giving COVID-19 relief?
In order to comply with super law, your SMSF must document the arrangement no matter when the arrangement began.
The Cleardocs Rent Relief (COVID-19) product allows an effective date to be entered and the document to be
signed at a later date thereby assisting you to document the arrangement even after it has been entered into
between the SMSF and tenant.