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22 April 2020 – 4:00pm

The Australian Government has released a number of superannuation measures to assist those affected by the economic impact of coronavirus (COVID-19). This is how SMSF Trustees could be impacted. 

Key takeaways

  • Individuals affected by COVID-19 will be allowed to access up to $10,000 of their superannuation in 2019/20 and a further $10,000 in 2020/21.
  • There is short-term relief to the minimum pension payment requirements.
  • If your SMSF has a property and tenant in financial distress, you can offer rental relief – even if the tenant is related.
  • For your SMSF to continue to receive concessional tax treatment, it must satisfy the residency conditions at all times during the financial year.

The Australian Government has announced a number of measures to assist Australian’s financially impacted by the coronavirus challenges. Alongside other stimulus efforts, the government is allowing early access to super, changes to some pension requirements and rental reductions.

Early release of superannuation

Individuals in financial distress as a result of COVID 19 will be allowed to access up to $10,000 of their superannuation in 2019/20 and a further $10,000 in 2020/21.

The eligibility criteria is as follows:

  • You must be unemployed; or
  • You must be eligible to receive a jobseeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
  • On or after 1 January 2020:
    • you were made redundant; or
    • your working hours were reduced by 20 percent or more1; or
    • you are a sole trader, your business was suspended or there was a reduction in your turnover of 20 percent or more.

If you are eligible, you can submit an application for early release via myGov. Once approved by the ATO, you will be issued with a determination advising of your eligibility to release an amount from the fund, and a copy will be forwarded to your superannuation fund, who will then release the money to you. Payments are tax free and will not affect eligibility to Centrelink or Veteran Affairs payments.

As an SMSF trustee, you must not release any money from the fund until this instruction is received from the ATO.

Important points to consider:

  • You will only be able to make one request for each financial year. For example, should you nominate for a lesser withdrawal amount in 2019/20, you will not be able to apply again before 1 July 2020 for the remainder nor will you be able to apply for more than $10,000 from 1 July 2020. 
  • As SMSF trustees, it is important that your trust deed is up to date prior to making any early release payments. Proper documentation is also required outlining the eligibility criteria and subsequent payments. 
  • Be aware of early release scams that are starting to appear such as unsolicited phone calls about your superannuation.

Minimum pension withdrawal reduction

The government has taken a similar approach to what it did during the Global Financial Crisis. They have provided a short-term relief to the minimum pension payment requirements on certain pensions for both the 2019/20 and 2020/21 financial years. The approach taken is that account based pensions, market linked pensions (also referred to as ‘term allocated’ pensions), transition to retirement income streams and any allocated pensions will only be required to withdraw 50 percent of the minimum drawdown rates. This measure does not apply to complying life-time or life expectancy pensions.

The change received Royal Assent (became law) on 25 March 2020 and applies to all superannuation funds inclusive of SMSFs.

Age (at 1 July) Default minimum drawdown rates (%) Reduced rates for 2019/20 & 2020/21 (%)
Under 65 4 2
65-74 5 2.5
75-79 6 3
80-84 7 3.5
85-89 9 4.5
90-94 11 5.5
95 or more 14 7


It is important to note, that if you have already taken out your minimum for the current financial year and it exceeds the reduced drawdown rate, you cannot return the excess unless you meet the contribution eligibility.

Rental reductions

The economic impacts of the COVID-19 crisis are causing significant financial distress for many businesses and individuals.

If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This may even be the case when the tenant is a related party.

Ordinarily, charging a tenant a price that is less than market value in an SMSF is a breach of superannuation laws. However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in, or waiver of, rent because of the financial impacts of COVID-19.

For the 2019/20 and 2020/21 financial years, the ATO will not take action where an SMSF gives a tenant, who may also be a related party, a temporary rent reduction during this period.

What do you need to do?

Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives. And you should ensure that the reduction in rent is only temporary. There will need to be a set, agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.

You should also ensure that the financial difficulty faced by the tenant is linked to the financial impacts of COVID-19 and that any negotiated rent relief is measured against those impacts. You should make clear arrangements which detail the amount of discount, waiver or deferral of the rent.

In evidencing that the rent relief is reasonable, it would be best practice to make it consistent with an approach taken by an arm’s length landlord. This arm’s length approach for commercial tenancies has recently been released by the National Cabinet as a Rental Code of Conduct (PDF 234KB).

In relation to residential tenancies, further guidance is still required from each of the states and territories.

Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief meets these requirements. This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the terms of the lease temporarily. Even if you are both the tenant and landlord, these terms should be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile. If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19 they should not fall foul of the law.

SMSF residency

For your SMSF to continue to receive concessional tax treatment, it must satisfy the residency conditions at all times during the financial year. If this test is breached, the fund is at risk of becoming non-complying and its assets (less specific contributions) and its income are taxed at the highest marginal tax rate.

Three tests are required to be satisfied so as to determine whether an SMSF is an Australian Super Fund. These are as follows:

  • The fund was established in Australia, or at least one of its assets is located in Australia;
  • The central management and control of the fund is ordinarily in Australia; and
  • The fund either has no active members or it has active members who are Australian residents and who hold at least 50 percent of:
    • the total market value of the fund’s assets attributable to super interests, or
    • the sum of the amounts that would be payable to active members if they decided to leave the fund.

The first test is a once only test and hence test two and three are the important ones. The ATO recently posted on its website the following FAQ:

Question: After temporarily residing overseas for less than two years, we were about to return to Australia but became stranded overseas because of the COVID-19 health crisis. This forced absence means we will be out of Australia for more than two years. What will this mean for our SMSF?

Answer: An SMSF must be an Australian super fund to be a complying fund and receive concessional tax treatment.

The ATO further commented by stating that “The COVID-19 health crisis has resulted in many countries imposing travel bans and restrictions and a high degree of uncertainty generally around international travel. If the individual trustees of an SMSF or directors of its corporate trustee are stranded overseas due to COVID-19, in the absence of any other changes in the SMSF or the trustees’ circumstances affecting the other conditions, we will not apply compliance resources to determine whether the SMSF meets the relevant residency conditions”.

If this applies to you or any of the other members in your SMSF, please contact us so that we can advise you accordingly as these rules are not without complexity.

Footnote

1. The 20 percent reduction in hours or turnover test requires a comparison between your working hours or turnover at the time you made the application and your usual working hours/turnover prior to 1 January 2020.

Information accurate at the date and time published.

 

If you have any questions regarding the content of this article and would like speak to someone from our team please contact us.