‘Catch-22 situations’ with NALE unresolved as 1 July looms

Mr Day gave an example of Zhee, who is a trustee and member of his SMSF and has investment property in his fund.

“The tenant calls complaining of no electricity one morning and he goes in and undertakes the electrical repair work required, but he doesn’t charge his fund for that service,” Mr Day explained.

“Do we have a non-arm’s length expense in this situation? Is that going to taint the rent for that particular property?”

Mr Day said this would come down to whether Zhee was acting in his capacity as a trustee in doing this work or acting as a licensed electrician that should be charging his fund.

He noted that the SIS Act contains a provision that states that if you are a trustee of an SMSF, you cannot receive any sort of remuneration for acting as the trustee of the fund.

“You’re specifically prohibited from doing that. That’s an anti-avoidance issue around early access,” he said.

LCR 2021/2 confirms that the NALE rules will not apply where a trustee or director of a corporate trustee provides services in the capacity of a trustee, as trustees and corporate trustee directors of SMSFs are prohibited from being remunerated for any duties or services they perform in that capacity.

“What it basically says is that you will be acting as trustee if your actions are consistent with a legal duty or obligation in relation to being a trustee, so anything you do, that you are required to do as a trustee, cannot trigger the NALI provisions,” he explained.

“[However], there may be things that you decide to do. Let’s say you own an investment property and you’re a bit of a handyman and you go in and do some work. Does that mean that’s acting as trustee or not?”

Mr Day said some of the examples in the ruling seem to be contradictory and leave trustees in a situation where they don’t actually know what they should be doing, particularly in situations where they are licensed.

One of the examples in the ruling involves a plumber going in and doing some work out of hours and not relying materially on the assets or the equipment of his business.

“They basically say in that situation, because it’s minor or infrequent, we will accept the fact that while you are required to be licensed, that will not trigger a non-arm’s length expense,” said Mr Day.

“On the flip side [however], they also give an example of an electrician who goes in and does some work on the house or investment property that the fund owns and it states that the person cannot be acting in the capacity of trustee.”

Mr Day said this creates an issue in situations where the trustee cannot be remunerated.

“[While] the SIS rules prohibit a trustee being remunerated for any duties they perform in the capacity of trustee, section 17B goes in and further defines the situations where a person that is a trustee of a superfund can actually be remunerated for services that they provide to the fund in a capacity of other than as trustee,” he explained.

Section 17B states that a person that is a trustee can be remunerated where they perform those duties or services in a non-trustee capacity, they are appropriately qualified and licensed to perform the work and they operate a business of providing the services to the public.

“That last part is critical because it says that you need to be operating the business. What if you are an employee of that business? What if I’m a plumber or an electrician that is an employee but I’m not running a business?” he questioned.

“That would suggest that you are not permitted to charge your fund for any services you provide to the fund.”

Mr Day said this leaves the electrician, who is licensed and an employee, in a difficult situation because he can’t charge for these services, but the LCR suggests that he cannot be acting as a trustee when he does that work.

“He’s, therefore, in a catch-22 position. He’s not allowed to charge, but if he doesn’t charge, that will trigger NALE, which results in NALI for the rent for that year,” he said.

“Some of these issues do need to be worked through. I don’t think the LCR as it’s currently written, really works through these kinds of problems.”

In these sorts of situations, Mr Day said it might be safest for the trustee not to undertake the work themselves.

The definition in the ruling around minor and infrequent use of equipment and assets of a business also creates a significant grey area, warned Mr Day.

“If I’m a financial adviser, or a tax accountant. What the ruling says is that if you’re relying materially upon the work systems and software to do whatever you’re doing for the fund, that could trigger a non-arm’s length expense. But what it does say is that minor or infrequent use will be fine,” he noted.

“So, if we are not acting in the capacity of trustee, and we are relying a lot on our tools of trade or our experience and our software to a material degree, what this says is we should be charging the fund for the provision of those services. The only time we don’t have to is when those services or the use of that equipment is minor or infrequent.

“So, now you’re in a grey zone; what is minor and frequent? Imagine having this conversation with the client about what is minor or infrequent use?”