SMSFs not subject to retirement income covenant

The Government’s proposal that trustees of self-managed superannuation funds (SMSFs) should be subject to a retirement income covenant has been amended to only apply to industry, retail and corporate superannuation funds, after submissions questioning its utility were lodged.

Specialist financial services law firm, Townsends Law has noted the covenant, commencing from 1 July 2022, would require the trustee to have a strategy that outlines how they plan to assist their members to balance three objectives: maximising their retirement income, managing risks and having flexibility to access super savings.

This comes after the ATO recently confirmed that the COVID-19 reliefs that applied to SMSFs for the 2019/20 and 2020/21 financial years have been extended and will continue to apply to the current financial year of 2021/22.

The reliefs for SMSFs relate to residency, rent obligations, loan repayments and the strict application of the in-house asset rules.

Normally, SMSFs qualify for the superannuation taxation concessions by fulfilling the definition of being an ‘Australian resident superannuation fund’ and satisfying the principal residency test, which means the SMSF must have its central management and control either situated in Australia or temporarily out of Australia for no more than two years.

For SMSFs that own real estate, the trustee may have relieved the tenant by temporarily reducing or deferring rent payments due to financial hardship during the pandemic. If the SMSF is a commercial lender or has entered a limited recourse borrowing arrangement, loan repayments may have also been temporarily relieved or deferred.

Where an SMSF exceeds the 5% in-house asset threshold due to the financial impacts of COVID-19, the trustees must prepare and implement a written plan to reduce the excess level of in-house assets.

While contravening these rules may have previously involved regulatory action against trustees, the reliefs involve the ATO not taking compliance action on the condition that they apply only due to the financial consequences of COVID-19.