Show download pdf controls
  • Addendum: Auditor contravention reporting instructions specific to the 2019–20 and 2020–21 financial years due to the impacts of COVID-19

    Due to the financial impacts of COVID-19, SMSF trustees have found themselves having to provide or accept certain types of relief which may or may not give rise to contraventions under the superannuation laws.

    This addendum to the ACR instructions covers the following five areas of relief. It provides you with guidance and examples on when contraventions will arise as a result of the relief. It advises on which ones to report to the Commissioner in the ACR for the 2019–20 and 2020–21 financial years where the reporting criteria is met. The five areas of relief are:

    • providing rental relief
    • loan repayment relief
    • in-house asset relief
    • market valuations
    • early release of super on compassionate grounds due to COVID-19.

    Providing rental relief

    Some SMSF trustees who are landlords are giving their tenants rent relief as a rent reduction, waiver or deferral because of the financial effects of COVID-19.

    In this situation, it is possible the following contraventions of the SISA may arise:

    • section 109 – if the rental relief has not been offered on arm’s length terms
    • section 62 – if the SMSF trustee is offering rental relief that is not on arm’s length terms to assist a related party
    • section 84 – rental deferrals offered to a related party can amount to a loan by the SMSF and if that loan exceeds 5% of the value of the fund assets, then an in-house asset contravention may arise (see paragraphs 10 and 11 of Self-Managed Superannuation Funds Ruling SMSFR 2009/4)
    • section 65 – rental relief offered to a member or relative of the member either directly or indirectly can amount to providing financial assistance (see Self-Managed Superannuation Funds Ruling SMSFR 2008/1).

    Where the rental relief satisfies the three requirements below of being on commercial terms, due to the financial impacts of COVID-19 and is appropriately documented, a section 109 or section 62 contravention will not arise. Where there has been a contravention of section 65 or section 84 (or both) due to the provision of rental relief to a related party that meets the three requirements, then you are not required to report these contraventions. This is because our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action against these types of breaches.

    1.Commercial terms

    Where the rental relief offered by the trustee is commensurate with rental relief being offered by other landlords to unrelated tenants in similar circumstances, a section 109 contravention will not arise. You can use your professional judgment in forming an opinion on the commerciality of the arrangement. The National Cabinet Mandatory Code of Conduct (PDF 235KB)This link will download a file (national code) can also be used to provide assistance on whether the relief arrangement is commercial.

    The national code applies to all commercial tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper scheme, with an annual turnover of up to $50 million. However, the principles of the national code should nevertheless apply in spirit to all leasing arrangements for affected businesses, having fair regard to the size and financial structure of those businesses as well as non-commercial leases providing the relief is provided on commercial terms.

    The national code is scheduled to expire at the end of September when JobKeeper is planned to expire. So after that time, if the code is not extended auditors will need to try and obtain sufficient appropriate evidence of what type of arms’ length rental relief is continuing to be offered in the market at that time.

    Since the announcement of the national code, state governments also introduced measures to help landlords and tenants during the coronavirus crisis. These codes can also be used to assist in determining whether the arrangement entered into is commercial. Each of the states and territories have mandated the national code. Details about relief offered in each Australian state or territory can be found at Relief for commercial tenantsExternal Link information on the business.gov.au website.

    Some key requirements when dealing with tenants affected by COVID-19 under the national code include:

    • the tenant will need to self-assess whether they have been adversely impacted and a rental tenancy relief request made in writing
    • rental relief is provided in proportion to the loss of income experienced from the COVID-19 crisis and where a tenant is insolvent, the tenant may not be liable to pay rent
    • it will apply to negotiating any amendments to existing leasing arrangements in good faith, including where the parties are related
    • the tenant should stay committed to lease terms, subject to any amendment. The parties may draft an amended lease agreement for rental relief due to COVID-19 for a term of up to six months, consistent with the period allowed by banks for the deferral of loan repayments for small businesses who need assistance because of COVID-19
    • the tenant will need to be current with their rental payments and not in arrears as of 1 January 2020, consistent with banking requirements in relation to loan repayment relief
    • rental relief arrangements should be comparable with other similar lease agreements and in line with COVID-19 market conditions.

    When applying the national code or individual state or territory requirements to determine whether rental relief is commercial, you should ensure you apply the relevant requirements that existed at the time the SMSF trustee provided the relief. This is in case there are any amendments to these documents over the course of time.

    2. Rental relief must be offered as a result of the impacts of COVID-19

    If the trustee has offered rental relief to a tenant but there is no evidence of the tenant being impacted by COVID-19, then it has not been offered in good faith. Relevant contraventions must be reported if they meet the reporting criteria. An example of evidence that meets this requirement is the tenant's confirmation of registration or monthly declaration for the JobKeeper scheme.

    3. Appropriate documentation must be put in place reflecting the rental relief arrangement

    If there are temporary changes to the terms of the lease agreement in response to COVID-19, it is important that the parties to the agreement document the changes and the reasons for the change. The trustees can do this with a signed minute (where for example the trustees and the tenant are related parties). However, it is prudent to give effect to the changes by way of an agreement signed by both the parties and attach it as an addendum to the lease. It is also important to review the lease agreement as this may require a formal variation of the lease to be drafted or a renewed lease agreement. The documentation must also be executed contemporaneously once varied terms are agreed to by the parties. The parties must then adhere to the new lease arrangement to ensure the fund is not in breach of section 109 of the SISA.

    Rental relief provided by a Division 13.3A entity

    If the fund holds an interest in a related party which is exempt from being an in-house asset due to the operation of Division 13.3A of the SISR (interposed entity) and that interposed entity leases property to a tenant and offers certain relief such as a rental deferral, this may trigger the events in regulation 13.22D, thereby causing the fund’s investment in the interposed entity to become an in-house asset. This is because a deferral of rent can amount to a loan in the interposed entity. (see paragraphs 10 and 11 of Self-Managed Superannuation Funds Ruling SMSFR 2009/4).

    We have said we will not treat the investment in the interposed entity as an in-house asset in current and future financial years as a result of a deferral of rent being provided to the tenant due to the financial effects of COVID-19. This means we won’t take compliance action against the breach in the current and future financial years.

    This means you do not need to report an in-house asset contravention for current and future financial years providing the above three requirements are met. That is, if the rental relief is on commercial terms, is due to the impacts of COVID-19 and is adequately documented. We plan to make a determination by way of legislative instrument under paragraph 71(1)(f) of the SISA to exclude the fund’s investment in the interposed entity from being an in-house asset. This is so you can avoid informing trustees about this breach during the annual audit on an ongoing basis.

    Finally, you should report the contravention if you are not satisfied with one or more of the following:

    • the relief offered by the SMSF trustee or interposed entity is on commercial terms
    • the relief has been offered due to the adverse financial impacts of COVID-19
    • the relief arrangement has been adequately documented.

    In this case, report the contravention and explain in the ACR why you think there is a breach. You will also need to consider whether you qualify Part B of the audit report and you will need to communicate the issue to the trustee as per section 129 of the SISA.

    If we subsequently find the relief was genuinely provided as a result of COVID-19 then we won’t take compliance action against the fund.

    We will also not apply the non-arm’s length income rules (NALI) where SMSF trustees are in a position to provide rental relief, however the tenant does not request or require the relief.

    Example 1 – providing rent relief to a related party on commercial terms

    John and Sue are the individual trustees of the John & Sue SMSF. Their SMSF owns the property from which they also run a restaurant business together. Each month they pay their SMSF $1,200 in rent under the lease.

    Due to the impacts of COVID-19, John and Sue have been required to close their restaurant temporarily. The business is eligible for JobKeeper as they have suffered a 40% reduction in turnover. However, they are struggling to maintain their lease payments, therefore they request their SMSF provide proportionate rent relief of 40%.

    The national code for SME commercial leasing principles during COVID-19 guides in determining whether the relief is on commercial terms. John and Sue meet the code requirements as the SMSF related-party tenant both qualifies for the JobKeeper scheme and meets the standard of arm’s-length dealing. The national code requires that John and Sue are offered rent relief proportionate to the reduction in turnover of 40%, however at least 50% of the relief must be by way of a waiver with any balance being a deferral. Accordingly, the minimum rent relief that must be offered is a 20% waiver and 20% deferral of rent.

    John and Sue in their capacity as trustees of their SMSF agree to temporary rent relief based on the financial impacts COVID-19 has had on the restaurant and their ability to meet their lease payments. They immediately draft and sign an agreement in their respective capacities (that is, where the trustees of the SMSF are the landlord and John and Sue are the tenants). This acknowledges the request for rental relief, the reasons why relief was given and the varied terms for the next six months with a right to review at the time. The rent remains at arm’s length in the current environment. No contravention of s62 or 109 of the SISA has occurred and the auditor is not required to report the s65 contravention in the ACR.

    Note: If John and Sue’ s business had suffered a reduction in turnover of only 20% and they were not eligible for JobKeeper, they would not be covered under the national code. However, they could still reach an arm’s-length agreement for rent relief proportionate to the reduction in turnover where if they can show that their business was negatively affected by COVID-19.

    End of example

    The same principles apply when rent relief is provided by an entity covered by Division 13.3A (interposed entity). In these circumstances, rental deferrals can amount to loans and trigger an event within paragraph 13.22DExternal Link(b)(ii). This can cause the fund’s investment in the interposed entity to become an in-house asset for current and future financial years.

    If you can be satisfied that the parties are dealing on commercial terms and that the reason for the relief was due to the impacts of COVID-19 and appropriate documentation exists supporting the varied terms, then you do not need to report the contravention in an ACR for the current and future financial years.

    The situation in Example 1 (above) equally applies to rent relief provided within an interposed entity, but extra care should be taken to ensure the parties remain dealing at arm’s length. This is because failure to do this can amount to an event under sub regulation 13.22D(1)(l).

    Example 2 – providing rent relief that is not on commercial terms

    Ned’s SMSF has rented an investment property to his friend Bill for the last five years. Bill has always paid a commercial amount of rent based on the property’s value. At the start of the 2019–20 financial year, Bill has a steady job as manager of a supermarket. However, he starts to incur some large personal debts and falls behind on his rental payments from August onwards. Ned tells him that he can just catch up when he can afford the payments.

    By the end of June 2020 Bill still hasn’t caught up on the rental arrears payments. He asks Ned if he can just waive the payments because he has heard other landlords are doing that due to COVID-19. Bill hasn’t been financially impacted by COVID-19. Ned agrees to do this because they are friends. As the rental relief wasn’t provided due to the financial impacts of COVID-19, Ned reports a section 109 contravention in this situation.

    End of example

    Loan payment relief

    Due to the financial impacts of COVID-19, some licensed financial institutions and related parties are offering SMSFs loan repayment relief on limited recourse borrowing arrangements (LRBA). Alternatively, an SMSF may also have to offer loan repayment relief in relation to a loan it has made to a related or unrelated party who has been financially impacted by COVID-19.

    Related party providing SMSF LRBA relief

    Where a licensed financial institution such as one of the major banks offers loan repayment relief to an SMSF in respect of an LRBA, it is clear the arrangement would be considered to be on an arm’s length basis. However, this is less clear where a related party offers an SMSF this type of relief. In this situation, it is possible a section 109 contravention may arise if the relief has not been offered on arm’s length terms. The non-arm’s length income (NALI) rules might also apply.

    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. Therefore there is no contravention of section 109 of SISA and the NALI provisions do not apply.

    Currently, the Australian Banking Association (ABA) states that commercial lenders are providing loan repayment relief on the following basis:

    • interest and principal repayments on the loan can be suspended for up to six months
    • interest will continue to accrue on the loan during the deferral period
    • accrued interest is to be capitalised and form part of the amount to be repaid over the term of the loan
    • the borrower must have been financially impacted by COVID-19
    • the borrower must not terminate a lease or evict a tenant for rent arrears during the loan deferral period.

    However, as long as the trustee can provide evidence of loan repayment relief that replicates what the commercial banks were offering for real estate investment loans at the time they accepted the relief, then they should be able to demonstrate the parties are dealing at arm’s length.

    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 and is capitalised on the loan.

    Any further 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.

    The trustee(s) should document and provide evidence to you of the circumstances that have been considered to provide the loan relief and if you consider that they are maintaining an arms-length arrangement in the current environment, there is no contravention of section 109 of SISA and an ACR is not required to be lodged.

    If in your professional judgement, you do not believe that loan relief has been provided on an arms-length basis, then you should follow the reporting criteria for lodging an ACR and if reportable, also report why you consider the new arrangement does not meet the arms-length provisions in the current environment. You will also need to consider whether you qualify Part B of the audit report and will need to communicate the issue to the trustee as per section 129 of the SISA.

    When applying the loan concessions on the ABA’s banking website to determine whether loan repayment relief is commercial, you should ensure the trustee/s used the terms that were in place at the time the loan repayment relief was provided in case there are any amendments to these terms over the course of time.

    We would also not look to apply the NALI rules where the SMSF could take advantage of LRBA relief but chooses not to.

    Example – providing loan repayment relief on commercial terms

    Angela is director of the corporate trustee of her SMSF which borrowed money to purchase an investment property within her SMSF from her parents (a related party) under an LRBA. The tenants renting the property apply to Angela for a rent reduction due to the impacts of COVID-19. Angela agrees to a reduction in rent equivalent to the reduction in their turnover. Angela’s SMSF is not receiving the full amount of rent, and her SMSF has been financially impacted by COVID-19.

    Angela researches what banks are offering for investment loans for real estate in relation to COVID-19. She makes a request to her lender, her parents, to temporarily defer the loan repayments for the next six months with the interest being capitalised on the loan and repaid over the term of the loan. Angela and her parents agree to review the deferral arrangement in six months. Angela documents the changes to the loan terms, including the reasons for the changes, in an agreement signed by both Angela as trustee of her SMSF and her parents. She then keeps it as evidence to support her application for loan relief.

    Angela has transacted on an arm’s-length basis in relation to the varied loan terms, so there is no contravention of s109 and the NALI provisions do not apply.

    End of example

    SMSF trustee providing loan repayment relief

    Where an SMSF has loaned money on commercial terms to an unrelated party or a related party where the loan does not breach the in-house asset rules or section 65 (as per Self-Managed Superannuation Funds Ruling SMSFR 2008/1), it’s possible the borrower may have difficulty repaying the loan due to the financial impacts of COVID-19. In this case the trustee may have to provide the borrower some loan repayment relief. As long as the repayment relief is on commercial terms, has been necessary due to the financial impacts of COVID-19 and is appropriately documented, you will not need to report a contravention of section 109 or section 62.

    Where the loan is to a related party it’s possible the fund’s 5% in-house asset threshold may be exceeded at year end as a result of providing the loan repayment relief. If this is the case, the trustee should still prepare a plan to dispose of the excess by the end of the following income year. However, if the plan can’t be executed by the end of the following income year due to the ongoing financial impacts of COVID-19, an in-house asset breach does not need to be reported in the ACR.

    In-house asset relief

    A requirement under the in-house asset rules is to ensure a plan is prepared and executed by the following financial year if the value of the fund’s in-house assets exceeds 5% of the fund’s total assets as at 30 June. Due to the impacts of COVID-19 and the downturn in the market, we understand it might be difficult for funds who exceeded the 5% in-house asset threshold at 30 June 2019, to now execute a plan to dispose of the excess by 30 June 2020.

    While funds who exceeded their in-house asset threshold as at 30 June 2019 must still prepare a plan to dispose of the excess, we will not take compliance action against the fund where the trustee is unable to execute the plan and rectify the in-house asset breach by 30 June 2020 due to the impacts of COVID-19.

    This means you will not need to report in-house asset contraventions in the 2019–20 ACR, where the in-house asset position is impacted by the effects of COVID-19.

    If the trustee finds that they exceed the 5% in-house asset threshold as at 30 June 2020 for the first time, a plan must still be prepared on or before 30 June 2021. However, we will continue not to undertake compliance activity if the rectification plan was unable to be executed because the market has not recovered by 30 June 2021 or it was unnecessary to implement the plan as the market had recovered. This means you will also not need to report these types of in-house asset contraventions to us in the 2020–21 ACR.

    Example – in-house asset relief

    During the 2019–20 income year, Jill's SMSF makes a loan to a related party. The loan is on commercial terms, is under the 5% in-house asset threshold and does not contravene section 65. However, due to the financial impacts of COVID-19, the borrower becomes unable to repay the loan during the income year. Jill's SMSF provides loan repayment relief on commercial terms.

    At 30 June 2020, as a result of the loan relief and other assets in Jill's fund including listed securities declining in value, the value of the loan is now in breach of the 5% in-house asset threshold at year end. The trustees provide evidence to their SMSF auditor of the reasons for providing the loan repayment relief (which is due to COVID-19). Interest continues to accrue and is capitalised on the loan. Appropriate documentation is kept in place to demonstrate the varied loan terms.

    The trustee prepares a plan to dispose of the excess in-house assets by the end of the following income year. However, if they are unable to execute the plan by 30 June 2021 due to the ongoing impacts of COVID-19, they do not need to report an in-house asset breach in the 2020–21 ACR.

    End of example

    Market valuations

    There is no change to the reporting requirements of regulation 8.02B.

    Where you are not provided with evidence from the trustees that the fund assets have been reported in the financial statements at market value and the contravention meets the reporting criteria, an ACR should be lodged as per normal requirements.

    We do however understand that trustees may experience difficulties due to the impacts of COVID-19 in obtaining objective evidence to support the valuation of assets as per the requirement in the SMSF valuation guidelines.

    If this is the case you should provide reasons in the ACR as to why the trustee was unable to obtain the appropriate evidence and if we are satisfied this was due to the impacts of COVID-19, the contravention will not result in any penalties. Instead the trustee will receive a letter from us advising them to ensure they comply with our valuation guidelines and have supporting valuation evidence by the time of their next audit if possible, as repeated contraventions can lead to penalties.

    Early release of super on compassionate grounds due to COVID-19

    From 20 April 2020, eligible SMSF members were able to access up to $10,000 of their superannuation before 1 July 2020 and up to a further $10,000 from 1 July 2020 until 24 September 2020 to deal with the adverse economic effects from coronavirus. The eligibility criteria are set out in regulation 6.19B of the Superannuation Industry Supervision Regulations 1994 (SISR).

    In relation to forming an opinion on whether the fund has complied with the payment standards in regulation 6.17 of the SISR with respect to this new compassionate condition of release, you need to ensure the member has not illegally early accessed their benefits.

    This means checking that the trustee has a determination from the Commissioner confirming the member is eligible for early release of super and having regard to any provisions in the trust deed constraining such payments. You will not be expected to check that the member has met the eligibility requirements listed under regulation 6.19B of the SISR. However, if you suspect or find out during the audit that the member did not meet the eligibility requirements, you can report this information at Section G ‘Other Regulatory Information’ of the ACR.

    The determination is the document received from the ATO which specifies the super fund or funds and the amount of the preserved benefits or restricted non-preserved benefits that may be released from each fund. It is usually issued to the member (who also serves as the trustee for the purpose of paragraph 6.17D(2)(b) in this case) electronically via myGov or alternatively it can be issued by hard copy in the mail.

    We expect you to report a regulation 6.17 contravention where the amount subject to the determination has been released prior to the trustee receiving a copy of the determination, if that contravention meets the reporting criteria.

    Subregulation 6.17D(3) of the SISR states that the trustee must pay the member the amount approved for release ‘as soon as practicable’ after receiving the determination. That phrase is not defined in the regulations and the timing of payment may be dependent on a number of factors, such as where the fund does not have sufficient liquid assets and is disposing of some of those assets to facilitate the payment. In such cases, you can use your professional judgment as to whether you think the payment has been made as soon as practicable based on the fund’s circumstances.

    Where a member has received the determination, they may decide to no longer pursue release of the benefits or may wish to release a smaller amount than the amount stipulated in the determination. While this constitutes a breach of the payment standards, you are not required to report a contravention of regulation 6.17 in these circumstances.

    If a trustee was to release the amount stipulated in the determination in multiple lump sums, this would amount to a breach of regulation 6.17 as a result of the cashing restrictions in item 107A of the table in Schedule 1 of the SISR. These require that the amount specified in the determination is to be released in one single lump sum not exceeding the amount specified in the determination. This breach will need to be reported where the reporting criteria is met.

    Last modified: 29 Mar 2021QC 17603