Government Economic Response to COVID-19: Impact on Superannuation
The government has recently announced a number of economic initiatives to reduce the impact of COVID-19 on the Australian economy and to assist people adversely financially impacted. The initiatives directly concerning superannuation are:
- Temporary early access to super (TEAS)
- Temporary reduction of the minimum pension drawdown rates for retirees
- Impacts of the rent relief provisions on self-managed superannuation fund (SMSFs)
1. Temporary Early Access to Super (TEAS)
- Applications for the TEAS are being accepted through myGov from Monday April 20th 2020
- Individuals may access up to $10,000 in 2019-20 and a further $10,000 in 2020-21 (1 July – 24 September)
- Only one withdrawal is permitted in each year
- The payments released will be tax free to the individual - coronavirus amounts are not considered under any income or means tests
- One or more of the following requirements must be satisfied at the time of application for an individual to be eligible to apply for the TEAS (this does not mean that your application will be accepted):
- You are unemployed
- You are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (both single and partnered payments), special benefit or farm household allowance
- On or after 1 January 2020, either
- You were made redundant
- Your working hours were reduced by 20% or more
- If you are a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more
Supporting evidence is not required within the application, however records and documentation should still be retained to confirm your eligibility if necessary.
In relation to reductions in working hours and turnover, an individual will be eligible if their hours of work or turnover at the time of making the application has reduced by 20% or more compared to their average hours of work or
turnover in the second half of 2019.
Individuals who wish to apply to release benefits in both years need to lodge 2 applications. Applications for 2019/20 must be made by 30 June 2020 and applications for 2021 must be made between 1 July and 24 September 2020.
The ATO will assess and issue a determination via the member’s myGov account within 2 – 3 days. If the application is successful the ATO will notify the fund and super will be released as soon as practicable.
For SMSFs the trustees will be able to rely on the determination issued to the individual by the ATO. All documentation should be retained for audit purposes.
Additional considerations - General
Consider the financial impact on your retirement savings of withdrawing up to $20,000 from superannuation, particularly while superannuation balances may already be reduced as a result of market falls.
Additional considerations for SMSFs
Consider if your SMSF deed requires updating to enable a TEAS withdrawal.
Consider if your SMSF will still have sufficient resources to meet its other liabilities.
The ATO has flagged the occurrence of scams where people impersonate the ATO to steal money or personal details. They have advised that if you receive a phone call, text message or email offering to assist you to release your super early, do not provide any personal information or click on any links. You should contact the ATO to determine whether the communication is legitimate.
Other Early Access Options
There are also a number of other ways to receive early access to superannuation payments that are not under the COVID-19 scheme, including access on compassionate grounds, access due to severe financial hardship, and access due to a medical condition.
Information and requirements for these schemes can be found on the ATO website: https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Early-access-to-your-super/
2. Reduction of the Minimum Drawdown Rates
The Government has reduced the minimum annual withdrawal required for account based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities. For the 2019-20 and 2020-21 financial years, the minimum withdrawal has reduced by 50% based on your account balance.
If your pension or annuity commences during the 2019-20 or 2020-21 financial years, the 50% reduction applies proportionally on the account balance on commencement day.
Once the minimum drawdown rate has been paid, payments can be stopped for the rest of the year. Those currently withdrawing a monthly income stream payment may have already reached the reduced minimum drawdown rate for the 2019-20 financial year. Amounts taken above the reduced minimum drawdowns can only be recontributed if the individual is eligible to make superannuation contributions and is subject to the usual caps.
More information regarding withdrawal rates can be found on the ATO website:
3. Impacts of the Rent Relief provisions for SMSFs
The Government has implemented initiatives aimed at protecting renters experiencing financial hardships as a result of COVID-19. This may impact those who have invested in rental properties within their SMSFs either directly or via a related trust.
Moratorium on Rental Evictions
The Prime Minister has announced temporary measures to prevent landlords from evicting tenants who are unable to pay rent for the next 6 months if those tenants have experienced financial distress as a result of Covid-19. However, where the financial distress is not caused by the pandemic, lease agreements and rental payments should be honoured as usual. Along with a moratorium on evictions the Government is also encouraging landlords and tenants to come to a mutual agreement on rent relief or temporary amendments to leases.
At this stage, the requirements of this initiative are lacking in detail so it is important to retain all supporting documentation if you are affected.
There are unlikely to be issues with the temporary rental relief provisions for those engaged in arm’s length lease agreements with their tenants. However, any lease term amendments made should be properly documented. This will provide evidence for your fund’s auditor and explain the temporary reduction in rental income.
Rent Relief to related parties
There are a number of compliance risks associated with this new rent relief initiative for SMSFs who lease commercial property to related parties.
Providing rent relief to related parties risks breaching a number of Superannuation Industry (Supervision) Act 1993 (SIS Act) provisions. These include:
- The sole purpose test - the purpose of undertaking an investment property should be to increase the retirement benefits of the SMSF members. Providing rent relief may appear to have the purpose of helping your tenants if you have mutual interests.
- Financial assistance - reducing rent will personally provide financial assistance to a member or relative outside of the SMSF.
- Arm’s length dealing - because of inherent bias assumed to exist between related parties, it is harder to prove that the SMSF is dealing with the tenant in the same way they would if they were unconnected with members.
This matter was brought to the ATO’s attention and their response is as follow:
“Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of COVID-19 and we understand that you may wish to do so as well.”
“Our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action where an SMSF gives a tenant — who is also a related party — a temporary rent reduction during this period.”
It is important to note that the rent reduction must be temporary. Furthermore, the ATO’s position is that the rent reduction does not have to be justified by market evidence (the SMSF has discretion to allocate its own rent reduction). However, supporting documentation should be retained to prove the reduction is reasonable, particularly for those renting to related parties. The Government has also suggested that any lease term amendments should be proportionate with the detrimental impact of COVID-19 that has been experienced by the tenant.
Also, SMSF members should be cautious when adopting the initiatives proposed by the government, particularly in their early stages, given the inherent risks and compliance issues during this quickly changing economic environment.
Interposed unit trusts
There is no clear relief offered to SMSF funds that own property via an interposed unit trust. In particular for a non-geared unit trust (NGUT) fund trustees should be cautious in applying the rent relief scheme as registered contraventions triggered under reg 13.22D of SISR require the affected SMSF to dispose of its units in that trust to comply with the regulations.
NGUT owners should ensure that their leases remain legally enforceable and that the rent accrued does not constitute a loan under the lease so the trust remains in compliance with the criteria in Div 13.3A of the SISR.
Limited Recourse Borrowing Arrangements (LRBA)
There may be further complications for SMSF landlords seeking to provide rental relief if they have borrowed money under a related party LRBA.
Again, treating your tenants in an arm’s length manner is paramount when collecting money owing under the LRBA. PGC 2016/15 highlights that trustees should maintain evidence “that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.” If the ATO does not believe an arm’s length transaction has occurred, they may consider applying non-arm’s length income (NALI) rules, which means that income or capital gains earned are taxed at the highest marginal rate.
As discussed above, there could be complications for a SMSF who provides rent relief, particularly to related parties and prior to there being more guidance available.
National Cabinet has begun to create an industry code of practice for commercial tenancies which may begin to overcome some of the issues discussed above. The codes, made for each industry, will be incorporated into state and territory legislation so they are mandatory for relevant tenancies.
The National Cabinet is set to finalise the Industry Codes soon, however it is still recommended that SMSFs closely follow the SIS and SISR to mitigate any non-compliance risks.