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Formal rent relief documentation essential

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SMSFs have been reminded only formal legal documents can be accepted by an auditor when assessing any rent-relief impacted income.

SMSFs that have offered any form of rent relief under COVID-19 provisions should only rely on formal agreement documents in recording that relief and may breach in-house asset rules or arm’s-length requirements if they fail to do so, according to an SMSF legal expert.

DBA Lawyers principal Dan Butler said as rent relief measures start to expire in different states around Australia, trustees needed to ensure any rent relief, waivers or alterations on a lease were recorded in legally enforceable and formal documents and not an exchange of letters or trustee resolutions.

Butler noted rent relief measures for commercial tenancies had ended in South Australia and would also come to an end in New South Wales, the Australian Capital Territory, Victoria and Western Australia at the end of March and in Queensland at the end of April under current government plans, but these were actually extensions on previous deadlines.

“The ATO has already said they have concerns that some of these lease arrangements are not properly documented and that will have significant implications in respect to in-house assets and will also have non-arm’s-length income connotations,” he said.

This requirement was reinforced in the ATO-issued QC 17603, which covers auditor contravention reporting related to COVID-19-related rent relief measures, Butler confirmed.

“This addendum says that if there are temporary changes to the lease in response to COVID-19, it is important that the parties document those changes in their reasons for the change. It is also important to review the lease agreement and this may require a formal variation to be drafted or a renewed lease agreement,” he said.

“Given the numerous extensions of rent relief, have [trustees] been updating these lease documents accordingly? Will they satisfy the legally enforceable requirements in order not to be an in-house asset or not to blow up a non-geared unit trust?

“The question you have to look at is will you have sufficient and appropriate evidence for the SMSF auditor to be satisfied they will not need to do a contravention report?”

Butler, however, warned that any SMSF that had relied on an exchange of letters and resolutions by the trustee was likely to find they were not legally enforceable and could impact arm’s-length provisions within a limited recourse borrowing arrangement (LRBA).

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