01/04/2020

A suite of measures have been put in place by the Federal Government and the ATO to alleviate the coronavirus economic impact on households and businesses.  The superannuation measures dealt with in this Update include minimum pension reduction, early release of super, temporary rent reduction, in-house assets and investment strategy.  Further updates will be provided as the relief effort continues and more incentives introduced.

Minimum pension limit reduction
The SIS Regulations have been amended.  There will be a temporary 50% reduction in the minimum pension limit applicable to the 2019-20 and 2020-21 financial years for allocated pensions, account based pensions and market linked pensions.

Reduced minimum pension rates for account based pensions (including allocated pensions)
The reduced rates for minimum pension payments are set out below.

Age               Rates (after reduction)
Under 65               2%
65-74                    2.5%
75-79                    3%
80-84                    3.5%
85-89                    4.5%
90-94                    5.5%
95 or more            7%


Pension drawdown strategy
•    If a member has already withdrawn pension in excess of the new minimum limit for the 2019-2020 financial year, the pension payment can be stopped or re-contributed back to super, subject to contribution eligibility and cap limits.

•    In some circumstances, a member may have to keep up pension payments to meet living expenses, even though they have exceeded the minimum pension limit.  Once the minimum pension amount has been withdrawn, the member will have the option to receive any further payment as a commuted lump sum or  pension.  Receiving the payment as a commuted lump sum will result in a debit or reduction to the member’s transfer balance account (currently capped at $1.6 M), thus increasing the available cap space for future income streams, subject to proper documentation. All super benefits paid from a taxed fund are tax-free to a member who is aged 60 and above.

Coronavirus early release of super
A new condition of release “Coronavirus compassionate ground” has been introduced (sub-regulation 6.19B SIS Regulations).  For full details, including criteria of eligibility, application procedures, SMSF implications, refer to SUPERCentral’s update article COVID-19 EARLY RELEASE OF SUPERANNUATION.

Temporary rent reduction
This covers the situation where an SMSF owns real property which is leased to a related party.  The property is typically business real property due to the in-house asset restriction.  The rent must be “no more favourable to the other party than those which it is reasonable to expect would apply, if the trustee were dealing with the other party at arm’s length” (Section 109 SIS Act).

In its SMSF Q&A update, the ATO takes the following position in relation to rent reduction:

“Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the 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.”

The ATO’s suspension of compliance action in the above regard applies to related party tenants under both LRBA and direct rental arrangements.

In-house assets
The downturn in the share market may result in the SMSF not meeting the 5% in-house asset limit at the end of the financial year.  In this situation, the ATO will not undertake compliance activity if a rectification plan is in place by 30 June 2021, as follows:

“If, at the end of a financial year, the level of in-house assets of a SMSF exceeds 5% of a fund’s total assets, the trustees must prepare a written plan to reduce the market ratio of in-house assets to 5% or below.  This plan must be prepared before the end of the next following year of income.  If an SMSF exceeds the 5% threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021.  However, we will not undertake compliance activity if the rectification plan is unable to be executed because the market has not recovered or it is unnecessary to implement the plan as the market has recovered.”

Investment strategy
The ATO considers that an SMSF investment strategy must be reviewed regularly at least annually and in the case of significant events.  Major market correction and volatilities are a significant event in this regard.  In relation to the coronavirus situation, the ATO accepts that short-term variations to the investment approach including asset allocations does not constitute a variation from the investment strategy but action must be taken to adjust the investments.  

“Where the assets of an SMSF or the level of investment in those assets fall outside of the scope of your investment strategy, you would take action to address the situation, which could involve adjustments to investments or updating your investment strategy.  We don’t consider that short term variations to your articulated investment approach, including to specified asset allocations whilst you adjust your investments, constitute a variation from your investment strategy.”

It has to be borne in mind that in relation to SIS compliance, the SMSF is not assessed on the merits or performance of the investments in the investment strategy, but whether the strategy has been formulated, reviewed regularly and implemented in accordance with sub-regulation 4.09(2) of the SIS Regulations. This is an operating standard.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.