Last night, the ATO released key information as to the approach they are going to take for SMSFs in the wake of COVID 19.
It’s great to see that they are taking a practical approach to this and have listened to the advice as to the knock-on effects expected to hit SMSFs.
They’ve broken it down into 4 key categories:
- Reduced Rental payments
- In-house assets
- Investment Strategy allocations
- Reduced Pension Minimums
reduced rental payments
Where an SMSF has a related party tenant who has applied for a rent reduction during this period the ATO has confirmed that they will not be enforcing the compliance issues that this would normally bring.
This makes sense as many businesses have already requested a reduction in rent, so it is very commercial for a related party tenant to request this from the SMSF. However, the clarity provides us as advisers and you as trustees a lot of comforts.
My recommendations are still to:
- Have the tenant write to the SMSF trustees to formally request a reduction in rent and state why this is necessary for their business at this time.
- Have the SMSF trustee document what they have considered in agreeing to a reduction of rent. This should still include:
- Cash flow considerations for the SMSF
- Can the SMSF get any concessions on its loan repayment
- Can the fund still meet the required pension payments and outgoings of the fund?
- What market evidence have they considered when agreeing to this reduction.
- Confirm the length of time the rent will be reduced.
in-house asset limits
Where are SMSF already has an investment in a related party that exceeds 5% as at 30 June 2020 or 30 June 2021 due to the current market downturn – the ATO will not require the compliance measures to be put in place.
This does not mean you can go and invest in a related party now, knowing that it would exceed 5%. But it does allow you to retain those existing investments that were within the limits pre-COVID 19.
investment strategy allocations
All SMSFs are required to draft and implement an investment strategy which includes listing out the targeted allocation of each investment class.
Many of funds would now be outside these investment ranges and should technical re-balance their portfolios. However, the ATO has confirmed that they will ignore this issue during this period. This is a recognition of the fact that re-balancing a fund’s portfolio during this period may crystalise losses unnecessarily.
It is, however, worth revisiting your investment strategy during this period and ensuring that you don’t need to make any adjustments to meet investment goals or liquidity needs of the fund during this period.
50% reduction in pension minimums
This measure was specifically legislated as part of the stimulus package. But it’s important to note that your pension minimum has been reduced by 50% for the 2020 and 2021 financial years. This will assist the fund with cashflow required during this period and also help avoid selling an asset in a down market.
If you need to take more than the reduced minimum pension to fund your lifestyle requirements, it would be worth discussing withdrawal strategies with your advisers as you may be better off taking a lump sum withdrawal instead of a pension during this time.
While the ATO has provided some important concessions to SMSF trustees during this time, we urge you to remember that as a trustee you still need to put the fund and its member’s interest at the forefront of the decisions you make.
Documentation during this period will be important, and protecting the future you as well as the current you is important. It can be hard to balance these decisions when business is tough but we are always here to help and be a neutral sounding board for you.
If you have any questions or would like further advice – please do not hesitate to contact me or your SMSF adviser.
Information provided in this blog and on this website is general in nature and does not constitute financial advice. Every effort has been made to ensure that the information is accurate, but information may become outdated as legislation and new government announcements are made. Individuals should not rely on this information to make a financial investment decision as it does not take into account their personal circumstance. Before making any decisions, we recommend you consult a licensed adviser to take into account your particular financial situations and needs.
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