SPR 2020/D2 - Explanatory statement


Superannuation Industry (Supervision) Act 1993

Draft Explanatory Statement

General Outline of Instrument

1. This instrument is made under paragraph 71(1)(f) of the Superannuation Industry (Supervision) Act 1993 (SISA).

2. This instrument ensures that a self-managed superannuation fund (SMSF) asset will not be considered an In-house asset where the SMSF, during the 2019-20 and 2020-21 financial years, either:

(a)
allows a related party tenant a deferral of rental income under a lease (on arm's length terms) due to the financial impacts of the coronavirus known as COVID-19, or
(b)
holds an interest in a related party which is exempt from being an In-house asset due to the operation of regulation 13.22B or regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (SISR), and that related party allows a tenant a deferral of rental income under a lease (on arm's length terms) due to the financial impacts of the coronavirus known as COVID-19.

3. The instrument is a legislative instrument for the purposes of the Legislation Act 2003.

4. Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument of a legislative or administrative character (including rules, regulations or by-laws) the power shall be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.

Date of effect

5. This instrument commences the day after it is registered on the Federal Register of Legislation.

6. Under section 12(2) of the Legislation Act 2003 this instrument does not adversely affect the rights or liabilities of any person other than the Commonwealth.

What is the effect of this instrument

7. The effect of this instrument is that assets covered by this Legislative Instrument are determined not to be In-house assets of the SMSF.

Compliance cost assessment

8. Minor - there will be minimum impact for both implementation and ongoing compliance costs. The legislative instrument is minor and machinery in nature.

Background

9. This instrument has been developed to ensure that a deferral of rental income under a lease (on arm's length terms) amounting to a loan provided during the 2019-20 and 2020-21 financial years, does not result in an In-house asset or cause the SMSF to lose its In-house asset exemption in a related party covered by regulation 13.22B or regulation 13.22C of the SISR.

10. Where an SMSF trustee(s) offers a deferral of rental income under a lease (on arm's length terms) directly to a related party tenant, the deferral can constitute a loan to the related party within the meaning of that term in the SISA. The definition of 'loan' in subsection 10(1) of the SISA includes the provision of credit or any other form of financial accommodation, whether or not enforceable or intended to be enforceable by legal proceedings. This definition includes arrangements that are in substance financing arrangements deferring the payment of an amount (see paragraph 11 of SMSFR 2009/4 Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993). Such arrangements would include but are not limited to deferring the payment of debts such as rental payments due to the SMSF trustee under a lease.

11. This means that when an SMSF trustee accepts a request for a deferral of rental income under a lease (on arm's length terms) directly from a related party, the deferral results in the trustee acquiring an In-house asset that is not covered by any of the exemptions in subsection 71(1). When the value of an SMSF's In-house asset investments exceeds 5% of the total value of its assets, the SMSF trustee is required to prepare and implement a written plan to dispose of the excess by the end of the following year of income pursuant to section 82. It also means that the SMSF trustee cannot acquire any further In-house assets under section 83. There are penalties for not complying with the In-house asset provisions.

12. The restrictions on an SMSF trustee having an In-house asset do not apply to an investment in a related party of the SMSF if it is an asset specified in the regulations not to be an In-house asset pursuant to paragraph 71(1)(j). An investment in a company or unit trust specified in regulations 13.22B or 13.22C is not an In-house asset. These entities are often referred to as a non-geared company or unit trust. However, regulations 13.22B or 13.22C will cease to apply to the SMSF's investment in the company or unit trust if any of the events in regulation 13.22D occur, including the company or unit trust providing a loan to another entity (see subparagraph 13.22D(1)(b)(ii)).

13. Where a company or unit trust covered by regulations 13.22B or 13.22C (that is a related party of the SMSF) allows a tenant a deferral of rental income under a lease (on arm's length terms) due to the financial impacts of the coronavirus known as COVID-19, the company or unit trust will have provided a loan to another entity. Accordingly, the SMSF investment in the company or unit trust will become an In-house asset for the current and all future financial years. This will mean that the SMSF will need to dispose of the investment where the value exceeds the 5% threshold.

14. Given the context of the COVID-19 pandemic and the long term effects of triggering an event in regulation 13.22D, the Commissioner believes it is appropriate to exercise his powers as Regulator under paragraph 71(1)(f) to exclude the SMSF's investment from being an In-house asset where the deferral of rental income is provided during the 2019-20 and 2020-21 financial years. This also means that SMSF auditors will not be required to report a contravention to the ATO or to advise trustees of the contraventions which would otherwise result in relation to the 2019-20, 2020-21 or future financial years.

15. 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 impacts 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.

16. The exclusion will only apply to the deferral of rental income under a lease (on arm's length terms) made in the 2019-20 and 2020-21 financial years, being the income years during which tenants are likely to be impacted financially by the coronavirus known as COVID-19.

Exemption from disallowance and sunsetting regime

17. Part 4 of the Legislation Act 2003 (LA) provides for the sunsetting of legislative instruments. However, paragraph 54(2)(b) of the LA provides that Part 4 of the LA does not apply if the legislative instrument is prescribed by regulation. Section 11 of the Legislation (Exemptions and Other Matters) Regulation 2015 (EOMR) provides a list of instruments that are not subject to sunsetting. Item 6 of the table in section 11 of the EOMR lists instruments (other than regulations) relating to superannuation. As a result, Part 4 of the LA does not apply to this instrument. Therefore this instrument will not sunset.

18. Section 42 of the LA provides for the disallowance of legislative instruments. However, paragraph 44(2)(b) of the LA provides that section 42 does not apply to legislative instruments prescribed by regulation. Section 9 of the EOMR provides a list of instruments that are not subject to disallowance. Item 4 of the table in section 9 of the EOMR lists instruments (other than regulations) relating to superannuation. As a result, this instrument is not a disallowable legislative instrument under section 42 of the LA.

6. Consultation

19. Subsection 17(1) of the Legislation Act 2003 requires, before the making of a determination, that the Commissioner is satisfied that appropriate and reasonable practicable consultation has been undertaken.

20. As part of the consultation process, you are invited to comment on the draft determination and its accompanying draft explanatory statement.

Please forward your comments to the contact officer by the due date.

Due date: 31 August 2020
Contact officer: Kellie Grant
Email address: Kellie.Grant@ato.gov.au



Louise Clarke
Deputy Commissioner of Taxation
Policy, Analysis and Legislation
Law Design and Practice

SPR 2020/D2 - Legislative Instrument

Legislative References:
Acts Interpretation Act 1901
The Act

Legislation Act 2003
The Act

Superannuation Industry (Supervision) Act 1993
The Act

Superannuation Industry (Supervision) Regulations 1994
The Act