Support for Self-Managed Super Funds impacted by Covid-19

In recent times the Government has introduced a series of measures to protect the Australian economy against the impact of COVID-19.  A number of these measures have had a direct impact on Self-Managed Superannuation Funds (SMSF).
 
Following below you will find a summary of the main measures affecting SMSF including; reduction of the minimum pension rates, temporary early access to superannuation, limited recourse borrowing, in-house assets and investment strategy.
  
1. Reduction of the minimum pension rates
 
Effective for the 2019/20 and 2020/21 years the minimum pension requirements have been halved. This applies to account based pensions, transition to retirement income streams and market linked pensions. This measure does not apply to defined benefit income streams.  The new minimum pension rates are as follows;
 

Age

Normal Rate

Reduced Rate

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%

In order to calculate the new minimum pension requirements, the new reduced minimum pension rate is applied. You do not apply the normal rate and divide by two, this method increases the risk of the minimum pension not being met for the financial year.
 
The legislation for this change received Royal Assent on 24 March 2020. If you have drawn a pension prior to 24 March 2020 and the amount is above the new minimum pension requirement, this will still be treated as pension payments and not lump sum commutations. It may be possible for the excess pension drawn to be recontributed back into the Fund provided the contribution eligibility requirements are met.
 
There are a number of different strategies that can be implemented when looking at the treatment of drawings for the 2019/20 financial year.
 
2. Temporary early access to Superannuation
 
People affected by the impact of COVID-19 will be able to access up to $10,000 of their preserved superannuation in 2019/20 and an additional $10,000 in 2020/21. This will be available between 24 March 2020 and 24 September 2020, and the payments are being made under the compassionate grounds condition of release. Payments will be tax free and will not affect the receipt of any Centrelink benefits.
 
Applications for the payment are available now for SMSF Members through the myGov website, however, the determination is given to the members not the trustees. The Government hopes that the determinations will only take three days.  It is important that the release of payments is minuted within the fund documentation.
 
Each person can have up to two releases only. The date of the release is based on the day the application is made, and not when the determination is made or the payment received by the member.
 
The eligibility criteria for the payment is: 
  • You are unemployed; or
  • You are eligible for the job seeker payment, youth allowance for jobseekers, parenting payments, special benefit or farm household allowance; or
  • On or after 1 January 2020, you were made redundant; or
  • On or after 1 January 2020 your working hours were reduced by 20% or more; or
  • You are a sole trader and on or after 1 January 2020 your business was suspended or there was a reduction in your turnover of 20% or more
3. Temporary rental relief
 
If an SMSF owns a commercial property and the property is rented to a related party who is unable to pay rent, there is some relief for these tenants while the SMSF remains compliant.
 
For the application of rent relief it is key that the tenant approaches the landlord and that this step is documented. The trustee then needs to decide what to offer the tenants and the timeframe of the arrangement. The trustee has a few different options: 
  • Rent deferral
  • Rent reductions
  • Not charge rent for a period of time
  • Replacing the tenant
It is vital that all the steps and decisions are documented and any decision made is based on current market conditions as evidence may need be provided to the fund auditor. 
 
The trustee will need to review lease agreements to see if the lease includes clauses for variation or force majeure.
 
The ATO has advised that they will not be taking any action against SMSFs where the tenant has been given a temporary rental reduction for the 2019/20 and 2020/21 financial years. However, it is important to remember s109 of the SIS Act that states the terms and conditions of the transaction are no more favourable to the other party than those which it is reasonable to expect would apply if the trustee or investment manager, as the case may be, were dealing with the other party at arm's length in the same circumstances”.
 
If the tenant is not a related party, the SMSF still needs to document the rental relief arrangements and the reasoning behind any decisions.
 
It is expected that the ATO will release further clarification in relation to related party tenants and post-99 trusts in the coming days.
  
4. Limited recourse borrowing arrangements

Where a SMSF has a limited recourse borrowing arrangement (LRBA) with a financial institution, the fund should approach the lender to see what relief is available to the Fund. Any correspondence and decisions by the financial institution should be documented by the SMSF.
 
For SMSFs that have related party borrowings (following Safe Harbour rules) they still need to ensure that the borrowing is at arm’s length. The related party borrowing can mirror commercial arrangements, which could include ceasing principal repayments and capitalising interest. The approach and any decisions made will need to be documented.
 
It is anticipated that the ATO will be providing additional guidance concerning LRBA in the future.
 
5. In-house assets
 
In the circumstance where an SMSF has an in-house asset the ATO has also eased their compliance approach.
 
A Fund may have a loan to a related party and under normal circumstance this loan represented less than 5% of the SMSF’s total assets. However, due to the impact of COVID-19 there is a fall in the value of the SMSF’s other assets this loan now represents more than 5% as at 30 June 2020. The SMSF will be required to implement a written plan and take action prior to 30 June 2021.
 
The ATO will not be taking compliance action if the SMSF is unable to carry out the rectification plan because the market had not recovered, or if the rectification plan was unnecessary due to the market having recovered.
 
6. Investment Strategy
 
Any investment strategy will need to be reviewed as the SMSF’s assets may have fallen outside the scope of the investment strategy due to the significant change to market conditions.  If this is the case, the investment strategy will need to be updated, or an adjustment made to the investments of the SMSF.  It is more pertinent than ever that any investment decision is made in line with the investment strategy.

ATO REFERENCES

There are many resources available on the ATO website that relate specifically to COVID-19 support and SMSFs which are linked below.

SMSF FAQ’s
 
ATO Economic Response for SMSFs and their Members

How can Moore Stephens assist?
Moore Stephens can assist SMSF Members navigate the current environment, providing advice on individual member situations and updating investment strategies