COVID-19 rent deferral IHA relief

The ATO has issued draft SPR 2020/D2 which when registered will exempt SMSFs that allow a rent deferral to a related party tenant from the in-house assets (“IHA”) provisions in the following situations.  The transitional measure applies to the 2019-20 and 2020-21 financial years.

The moratorium 

 A deferral of rental income under an arm’s length terms lease amounting to a loan to a related party tenant impacted by COVID-19 will not result in an IHA of the SMSF.

The exemption will also apply to SMSFs that hold an interest in a SIS regulation 13.22B or regulation 13.22C related entity (company or unit trust) that provides rent deferral to a tenant of an arm’s length lease under COVID-19 circumstances.  The related trust or company will not lose its IHA exempt status.

What is the IHA? 

In the absence of the moratorium, the rent deferred is a loan which is an IHA under Section 71(1) of the SIS Act 1993. 

Section 10(1) of the SIS Act defines loan to “include provision of credit and any other financial accommodation whether or not enforceable by legal proceedings.”  The definition is inclusive and can include arrangements where an amount is deferred and ultimately payable (SMSFR 2009/4).  The rent deferred is a financial accommodation of the amount deferred.

Section 71(1) of the SIS Act provides that an in-house asset includes an asset of the fund that is a loan to, or an investment in, a related party or a related trust of the fund. It also includes a lease or lease arrangement with a related party, except business real property.  In the absence of the moratorium, the IHA is the loan.  If the rent deferral is non-arm’s length, the SMSF will also have NALI and other SIS Act implications including IHA in relation to the leased asset.

Where the lease is provided by an interposed Regulation 13.22B or 13.22C company or unit trust, the loan (deferred rent) will cause the company or trust to breach Regulation 13.22D borrowing prohibition and the related company or trust will lose its IHA exemption under Div. 13.3A of the SIS Regulations.  Without the moratorium, the IHA in this instance will be the related company or trust. 

The ratio of the fund’s IHA cannot exceed 5% of the market value of the fund.

Conditions for the moratorium

The conditions are set out in the ATO Explanatory Statement.

“The exclusion will only apply to situations where the SMSF trustee or interposed entity has acted in good faith and, as a result of the financial impact of the coronavirus known as COVID-19, has offered the tenant a deferral of rental income under a lease (on arm’s length terms) during the 2019-20 and 2020-21 financial years in order to ease the financial hardship caused by COVID-19.  There should be contemporaneous documentation drafted reflecting the revised rental terms agreed to by the SMSF trustee or company or unit trust covered by regulation 13.22B or 13.22C and the tenant to ensure the parties continue to deal with each other at arm’s length and the lease remains enforceable.”

How about Section 65 of the SIS Act?

As the rent deferred is a loan within the meaning of Section 10(1), the rent deferral will also potentially contravene Section 65 of the SIS Act which prohibits a trustee of a regulated superannuation fund from lending money or providing financial assistance using the fund’s resources to a member or a relative of a member of the fund.

The ATO Addendum to Auditor Contravention reporting instructions specific for 2019-20 and 2020-21 financial years due to COVID-19 provides guidance in this regard.

The ATO will not take compliance action for breach of the following SIS standards where the requirements set out in the moratorium conditions section above have been met for the two transitional years.  The relevant sections of the SIS Act are:

  • Section 65 – rental relief offered o a member or relative of a member either directly or indirectly that can amount to providing financial assistance
  • Section 84 – rental deferral to a related party amounting to a loan by the SMSF
  • Section 62 – rental relief not a breach of the sole purpose test
  • Section 109 – rental relief does not meet arm’s length terms

It is also expected the ATO will extend the contemporaneous moratorium to Section 65 in relation to the IHA exemption.

For further information, please call Townsends Business & Corporate Lawyers on (02) 8296 6222 or email

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