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NALI rules tipped to impact SMSF property development

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By mbrownlee
August 21 2018
2 minute read
2 View Comments
SMSF property development
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The non-arm’s length income provisions will require SMSFs to carefully consider what services trustees are remunerated for in undertaking a property development to avoid unwanted attention from the ATO, says an industry lawyer.

Earlier this year, the government released draft legislation on non-arm’s length income aimed at rectifying a “technical deficiency” in the current provisions for NALI whereby non-arm’s length expenses result in the income not being treated as NALI as intended. The bill is currently before the Senate.

Speaking at a seminar in Sydney, DBA lawyers special counsel Bryce Figot said the explanatory memorandum for the bill goes into some granular detail about NALI.

 
 

The explanatory memorandum states that in certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties, for example, if the fund had a real estate portfolio, the trustee may be able to manage the properties or contract the services of a real estate agent.

“The question of whether the non‐arm’s length income rules apply in respect of services or functions that are undertaken by the trustee depends on the capacity in which the trustee undertakes those activities,” the explanatory memorandum states.

Mr Figot said this suggests that the SMSF member “can perform these services for free if they are acting in their capacity as trustee”.

However, he said the new NALI provisions raise some important questions for SMSF trustees who want to undertake real estate developments via their SMSF and whether they are remunerated for certain services.

Mr Figot gave the example of Kell who is a builder and runs his own company. The SMSF wants to acquire real estate and build two town houses and then sell them, he explained.

While, generally, trustees or directors of trustees can’t be remunerated, section 17B gives a bit of carveout and provides that SMSF trustees or directors can be remunerated if: they perform duties or services other than in capacity as trustee, they are appropriately qualified, they perform similar duties or services in the ordinary course of a business and the remuneration is no more favourable then if it were dealing at arm’s length in the same circumstances, he explained.

Therefore, the SMSF may want to acquire all physical items directly from third party vendors and remunerate the company so that the SMSF has still paid an arm’s length amount for services, in order to keep everything as simple as possible, he said.

“So hopefully, everything Kell does, he can be paid for, so the amount by which the fund is out of pocket is an arm's length amount,” he said.

There may, however, be services that Kell wants to provide for the property development for free, he said.

“The question is, can he perform those services for free if he’s acting in his capacity as trustee?” Mr Figot said.

“Now, hopefully, they’re very minor services and so it may not be an issue, but if they start to become major you really want to be remunerated,” he explained.

“The ATO may look at that and say that personal exertion is not being paid for. If you want to be vanilla, you want to pay an arm’s length amount — that is the vanilla answer.”

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Miranda Brownlee

Miranda Brownlee

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: miranda.brownlee@momentummedia.com.au

Comments (2)

  • avatar
    I have been trying to get my head around the best way to structure this type of strategy for years. Hoping to get some guidance and clarification on this at the SMSF Association Intensive Workshop on "Property development and structuring within an SMSF" I know I am not the only one as they have had to put on a second session in Sydney because of the demand.
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  • avatar
    Grant Abbott, I Love SMSF Wednesday, 22 August 2018
    Property development where a builder undertakes the building is one of the toughest areas to advise on. Bryce has started the discussion but there is so much more. The biggest question is if the builder gets involved can they do so as trustee. If as Trustee they can build for their own fund they why not other funds or other clients. Then we hit the business in a SMSF issue. The better set up would be to contract with the building company on a commercial basis in exactly the same way as the builder does with other clients - say cost + 10%. Any less and NALI will be levied on income and capital gains. There is also the danger that the Commissioner has stated that any increase in the value of the property may be seen as a contribution. That is a whole other headache again.
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