The past few months have seen significant changes to our personal and business circumstances due to the COVID-19 pandemic. No doubt you are well aware of the impact this is having on your Self-Managed Superannuation Fund (SMSF) and superannuation balances, but there are specific matters that SMSF Trustees should be turning their minds to at this time.
Many SMSF Trustees have seen significant movement in fund investments over the past four months. At this time it can be difficult to understand how markets will react in the short, medium and long term, and any investment decisions should be taken after full consideration of current market conditions and expected future market conditions.
BDO’s Mark Wilkinson presented an online webinar on this subject on 9 April 2020. If you were unable to tune in live, you can watch the full webinar by clicking here.
We recommend you discuss SMSF investments with your funds’ financial planner or investment adviser.
In late March 2020, the Federal Government announced a halving of the minimum pension requirements for the 2020 and 2019 financial years to assist trustee’s preserve their superannuation and pension balances. A similar measure was announced during the Global Financial Crisis in 2008.
If you have already drawn more than the minimum pension for the current financial year, you are not able to ‘put it back’. Any return of monies to the SMSF will be a contribution, and you need to ensure you can make contributions.
You do have the option of how any excess pension payments will be treated, possibly as lump sum benefits, if you have accumulation accounts as well as pension accounts. You should discuss this with your financial or BDO adviser.
Age of member at 1 July 2019
Revised minimum percentage factor
65 – 74
75 – 79
80 – 84
85 – 89
90 – 94
Early access to superannuation
The Federal Government has enacted measures to allow individuals in financial stress as a result of COVID-19 to access up to $10,000 of their superannuation benefits on a tax-free basis from now to 30 June 2020, and another $10,000 from 1 July 2020 to 30 September 2020.
Early access to superannuation will be available to individuals who:
- Are unemployed
- Are eligible to receive a JobSeeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance.
- As well as on or after 1 January 2020:
- Were made redundant
- Had their working hours reduced by 20% or more
- For sole traders, their business was suspended, or there was a reduction in their turnover of 20% or more.
Applications must be made directly via myGov, and the benefits released will not affect Centrelink or Veteran’s Affairs payments. The Australian Taxation Office (ATO) will then notify your superannuation fund (including SMSFs) that they can release the monies to the individual.
It is important to note that monies cannot be accessed under this measure unless a release authority has been received by the SMSF.
SMSFs with commercial property
SMSFs that hold commercial property may have already been approached by their tenants for some form of rent relief during this time, as their own businesses may be under financial stress.
The government has provided a mandatory code of conduct in relation to commercial tenancies. Landlords (including SMSFs) must provide rent relief if the tenant requests this and can show their turnover has reduced. The rent relief must be provided in proportion to the reduction in turnover, and 50% of the relief must be via a rent waiver and 50% as a rent deferral.
More information can be found at the Australian Government Business website by clicking here.
This does not mean the landlord and tenant cannot agree to different outcomes (but this is probably best described as a minimum requirement). For example, if the tenant simply wants a rental deferral, this can be agreed.
The key to providing this will be to ensure the SMSF trustees can show appropriate negotiations and documentation of any amendments made to lease agreements.
This is particularly important where the tenant is a related party, for example, the business premises of the member’s own business. The SMSF auditor will be looking for appropriate documentation to support any changes to the terms of the lease when they conduct their audit for the year ended 30 June 2020.
SMSFs with residential property
While there is no mandatory code of conduct, SMSF trustees may find that where they hold residential property, tenants who are under financial stress may request accommodation or rent relief as well.
Residential tenancies are governed by State Law and State Government authorities, so trustees should refer to the relevant state residential tribunal website for further information.
The key again will be negotiating between tenant, property agent and landlord, and the documentation of the agreements reached between the parties and any supporting documentation that is provided to support a request for rent relief.
Limited Recourse Borrowing Arrangements (LRBAs)
For those SMSFs with LRBAs, the impacts of COVID-19 on rental incomes, contributions by members or investment income, may impact the SMSF’s ability to make loan repayments under the LRBA agreements.
SMSFs that believe they may struggle to meet current loan repayments should contact their lender to negotiate revised repayment terms.
Where the lender is a related party (and not a financial institution), it will be important to obtain information as to what commercial lenders are doing in relation to this. One of the critical aspects to a related party loan is that it is executed on the same terms and conditions as the SMSF could expect to receive from a financial institution or bank. This is no different.
It is also important to ensure this information and the actual amendment to loan terms is documented and the documentation retained (for your SMSF auditor).
In house assets
If your SMSF holds what is known as an in house asset, trustees may find, due to the impact of COVID-19 on the valuations of other assets, the in house asset now represents more than 5% of the SMSF assets (the legislated threshold).
An in house asset is:
- A loan to a related party
- A lease of a SMSF asset to a related party
- An investment in a related party.
A related party is:
- A member, their spouse or a relative
- A trust or company controlled by a member, their spouse or a relative (or entities that they control).
Trustees should review fund assets and consider what they can do to reduce the in house asset ratio down below the permitted threshold of 5%. The superannuation legislation requires the trustee to document and implement a written in house asset remediation plan by the end of the next financial year (30 June 2021). Evidence trustees have addressed this matter will be critical for the SMSF audit on 30 June 2020 and for any ATO reviews undertaken.
In preparation for the FY20 SMSF audit
In addition to the matters considered above, SMSF trustees should turn their minds to other issues that could arise during the audit of the fund for the year ended 30 June 2020.
Some of these may include:
- Property valuations – we are yet to see the impact of COVID-19 on property values around Australia. We can see the impact on rental returns, but will value be impaired? Trustees may want to consider obtaining independent appraisals or valuations to support their own assessment of property values at year-end
- Valuation of unlisted investments – similarly to the point above, it may be difficult at this time to predict the likely impact of COVID-19 of some unlisted investments held by the SMSF. Trustees should ensure they can demonstrate what information they have obtained or considered in making an assessment as to the market value of these investments at 30 June 2020
- SMSF investment strategies – this has been a particular focus of auditors and the ATO during the past 18 months and will continue to remain a focus at this time. It may not be appropriate to change the fund’s investment strategy, but trustees are obligated to regularly review the strategy. The auditor will be particularly looking for evidence the trustees reviewed the SMSF’s investment strategy and the results of that review.our website.
The ATO’s response
The ATO has been extremely responsive at this time and is taking a relatively practical approach to the issues arising.
While not providing trustees with a ‘get out of jail free’ card, the ATO will not apply compliance resources to issues that arise if trustees have adequate evidence to support the position they have taken is reasonable in the circumstances. It may be that your auditor is still required to report a contravention. However, it is unlikely to result in action against the SMSF or trustees by the ATO.
They have also applied the same principles in relation to circumstances that might normally give rise to additional income tax liabilities from the imposition of Non-Arm’s Length Income (NALI) where transactions are not on normal commercial terms.
We urge trustees to review their SMSF and any issues before the end of the financial year. If you would like to discuss your personal situation or need assistance, please contact your local BDO adviser to ensure your SMSF retains its complying status. Our advisers have access to significant resources to assist you at this time.
Full details of BDO’s resources and insights regarding the current COVID-19 crisis can be found on our website.
If you would like to discuss your situation or if you have any other superannuation questions, please get in contact with one of our expert advisers.