Legal Tip 280: Related Party Rent Relief

Many families have related party leases

- Trading Company and Asset Trust

- Trading company and SMSF

- Mum/Dad and adult kids


Can the landlord give the tenant rent relief if related? Sure, why not!

Any rent relief should be commercial in nature so market amounts should be used, evidence of downturn or loss of job supplied, and any rent free periods temporary – but these could possibly be extended.


Can you do it as a strategy to shift income from one entity to another with a tax advantage? You possibly can, but only if genuinely affected. You should always think that you will be audited at some point. If business is booming your SMSF probably should not be giving you a reduction in rent, but on the other hand, if rents for your type of office have halved in the last few months you could potentially move premises and save rent, so it might be justified if your SMSF is offering a discount to keep you there. But this will mean less deductions outside of super and more profit in a high tax environment.

Extra care with SMSFs should be taken as the SIS Act could easily be breached.

Don't forget to document everything also.

Legal and tax advice should be sought.

 

Good point. I had this very discussion with a smsf trustee. Baking factory owned by the smsf. Work has stopped. They asked if suspending lease payments will be OK.
Yes. However the lease obligation still arises. The amount should be repaid later. Any related party concessions to vary the lease to discount rent or to disregard rent should likely be carefully considrered as this act may be or may not be on "arms length terms". I would consider disregarding rent a problem but a short term concession that is mutually agreed and on terms alike others may access may well be OK. But the smsf cant be a alternate source to assist cashflow through a enduring rent holiday as such. I discusssed this with our primary auditor and he agreed it is not a loan. It is a delayed receipt of incoome. No need for the smsf to accrue this but he would like to see the details of the arrears and when it may have been repaid. Remember too that underpaying non-arms length income is not a specific concern v's over paying which certainly is.

eg SMSF has two properties. One is the factory. Another is resi. The resi tenant cant pay. The factory is running at over capcity due to retail food demand. Owner increases factory rent from $5500 per month to $9,900 per month to offset the resi lost rent. That would certainly be a major concern as the fund has received excessive non-arms length income. The fund is non-complying with a tax issue at 47% perhaps on the sum of all member non-concessional balances. It could cost hundreds of thousands of dollar. An alternative strategy may be for the factory rent to be pre-paid to avert a tax problem.

 

ATO have said:

Related party limited recourse borrowing arrangement relief
Question: My SMSF has a compliant limited recourse borrowing arrangement (LRBA) in place with a related party. Would the non-arm's length income (NALI) provisions apply if the related party offers repayment relief to the SMSF trustees because of COVID-19?

Answer: We understand that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a related party due to the financial effects of COVID-19.

If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, we will accept the parties are dealing at arm’s length and the NALI provisions do not apply. For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.

The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will catch up any outstanding principal and interest repayments as soon as possible.

Any further repayment relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time.

Self-managed super funds frequently asked questions