Bryce Figot, special counsel for DBA Lawyers, said this involves careful journal entries, which should recognise the expense as a market value contribution.
“However, journalised contributions and expenses are not ideal. Best practice is for the SMSF to receive contributions directly and pay its expenses directly,” Figot said.
Figot said the ATO has indicated that it has become common within some parts of the superannuation industry for a person to pay an expense on behalf of a superannuation fund, so it is vital that SMSFs understand what can cause non-arm’s length income (NALI) and/or a contribution.
“Consider a situation where a related party pays an expense on behalf of an SMSF. This might include, for example, where an SMSF member personally pays an accounting invoice on behalf of the SMSF,” he said.
“ATO’s primary position is don’t do it, and ideally, that scenario should not arise. More specifically, the ATO states at paragraphs 172–3 of Taxation Ruling TR 2010/1, ‘This will usually involve an employer or member of the fund. The practice involves making journal entries after the expense is paid that, in the case of the employer or fund member, re-classifies the expense payment as a superannuation contribution and, in the accounts of the superannuation provider, recognises the making of the contribution and payment of the expense.
“The commissioner’s preferred approach is for all superannuation fund expenses to be paid directly out of the fund itself’.”
However, he continued that ATO has a second position in that it is a contribution.
“Let’s assume that an SMSF expense is paid on behalf of the SMSF. The ATO [goes] on to state in that same ruling that ‘where a person pays an amount to a third party to satisfy a liability of a superannuation provider, the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf’,” he said.
“Accordingly, if the SMSF journalises the payment as a contribution, then the ATO should accept the treatment as a contribution. However, journalised contributions are problematic. For example, if a member personally pays an SMSF expense, it is not immediately obvious for whose benefit the ‘contribution’ is made.”
Figot said it is, therefore, important to remember that if a contribution is made for someone other than the contributor, then the contribution is assessable income for the SMSF.
“This is regardless of whether the contributor can deduct the contribution. There is an exception for spouses under s 295‑165, but if, for example, a family trust pays the expense, then the contribution is included in the SMSF’s assessable income regardless of whether the family trust can claim a deduction for the contribution,” he added.
To determine if a payment is considered NALI the starting point is to consider whether a related party paid for the SMSF expense.
“That is when NALI occurs,” Figot said.
“Certain amendments occurred to the definition of NALI with effect from 1 July 2018. They relate to where an SMSF incurs expenditure lower than if dealing at arm’s length (including nil). However, presumably, NALI can be averted if the SMSF treats the expense as a journalised contribution.
“The ATO’s taxation ruling on contributions states ‘the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf’. This should prevent NALI [from] arising if the SMSF treats the expense as a journalised contribution, assuming that the SMSF journalises the market value of the expense as a contribution.”
