As the COVID-19 pandemic continues, so too does the uncertainty and volatility in investment markets, which in turn has seen a reduction in many people’s superannuation balances. The ATO has put some measures in place and provided guidance on relief and matters for consideration during the pandemic, for SMSF Trustees. We have highlighted a few of these key areas below.
Reduction of superannuation minimum payment amounts
The government has temporarily reduced super minimum drawdown requirements for the 2019–20 and 2020–21 financial years. This measure aims to reduce the need for retirees to sell investment assets in the current volatile financial markets to fund minimum pensions. As a result, the minimum pension drawdown has been reduced by 50%.
The table below shows the reduced percentage that apply:
Providing rent relief to related party business tenants
Due to the impacts of COVID-19, many tenants have sought rental relief from SMSF landlords.
It is welcome news that the ATO are taking a practical view on allowing temporary rental relief for SMSFs that own commercial property leased to related party business tenants. The measure aims to assist tenants who have been impacted by the financial impacts of COVID-19 by relieving or having their rent reduced for a period of time.
For SMSFs that own property that is leased to a related party, charging a rental rate that is less than market value would usually be a contravention, as the parties are not acting at arm’s length (requirement of SIS Section 109). However, the ATO have stated that provided the rental relief provided meets certain criteria, they will not apply any compliance resources to reviewing these arrangements during the 2019-20 and 2020-21 financial year.
The criteria to be satisfied include:
- Rental relief must be on commercial terms (eg reducing the rent proportionate to the trading reduction of the tenant’s business)
- Rental relief must be due to the financial impacts of COVID-19 (eg evidence of this could include the tenant’s monthly declaration of jobkeeper scheme)
- Appropriate documentation must be put in place reflecting the rental relief arrangement (eg minutes/letters or a renewed lease agreement or other contemporaneous document. Legal advice is recommended)
Valuations
SIS Regulation 8.02B requires SMSF Trustees to value their assets at market value. The impact of COVID 19 and the uncertainty surrounding unlisted asset and property markets may mean that SMSF Trustees might struggle to obtain sufficient appropriate audit evidence to provide to their SMSF auditor to prove the market value of such assets.
The ATO expects Trustees to consider the value of the assets in their fund each year. Typically, for property investments, it has been accepted that an external valuation would suffice every 3 years. However, due to COVID-19, the valuation might now have been materially impacted since it was last valued, and auditors will be looking for Trustee’s assessment of the valuation as at 30 June 2020.
It is not the role of the auditor to value the assets. The role of the auditor is to check that assets have been reported at market value and assess and document whether the basis and rationale of establishing the market value has been reasonable.
Where possible, the simplest and best way to provide evidence for audit purposes, would be to obtain an external valuation for the current year. If that is not possible, Trustees should ensure they document, the basis on which they have determined the current valuation to be appropriate. For property investments, this might include consideration of comparable sales or net income yields and support this with readily available data (eg from online real estate resources).
Please refer to the ATO’s valuation guidelines here to help SMSF trustees valuing assets for superannuation purposes.
Investment strategies
The impact of COVID 19 may be of such significance for some funds, that Trustee’s need to make some significant changes to their investment strategy.
The Superannuation laws require Trustees to prepare and implement an investment strategy for their SMSF, which they must then give effect to and review regularly. The strategy should be reviewed at least annually, and it should be documented that the Trustee has undertaken this review, noting any decisions arising from the review. Certain significant events, such as a market correction, should also prompt a review of the fund’s investment strategy and may require updating the investment strategy.
Your auditor will consider whether you have complied with your investment strategy during the annual audit.
If the assets of an SMSF fall outside of the specified ranges of the fund’s current investment strategy, the Trustees should take action, which might involve adjustments to investments or updating the investment strategy itself. If in doubt, trustees should seek investment advice.
Please refer to previous Davidsons article published in September 2019 here that further explains the investment strategy requirements of the SIS Act.
How can clients meet the signature requirements?
Under the super laws, SMSF trustees are required to sign their SMSF’s financial statements before finalising their fund’s audit each income year. COVID-19 impacts such as social distancing or isolation requirements or your accountant working from home may prevent trustees from signing the SMSF’s financial statements in person this year.
At Davidsons we have a number of options for our clients to meet the signature requirements on their annual SMSF financial statements and tax returns.
Our preferred option is for documents to be approved ‘electronically’ via our secure online client portal. Using this method allows clients to view and approve documents with a digital signature that is date stamped to the bottom of each document approved. Each trustee signing will require a separate email address to use this method (two trustees cannot use the same email address).
Alternatively, we can:
- email documents to clients to print so they can sign and scan copies back to us by email or;
- we can still post financial statements to clients and these can be physically signed and returned by post.
If you would like more information on any of the above, or other SMSF related matters, please contact our Davidsons SMSF Manager Simon Abbott on simona@davidsons.com.au or (03) 5244 6867.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.