SMSFs warned on balancing ‘tightrope’ expense risks from NALI
SMSFs managing various outgoings across the fund will need to carefully navigate different situational capacity changes that can affect the compliance risks on the fund, according to Heffron.
In a recent update, Heffron head of education and technical services Lyn Formica said with the incoming non-arm’s length rules (NALI), SMSFs must be prepared to balance any expenses that can create greater risk for the fund.
She noted that before any costs are paid from an SMSF, trustees and their advisers should first ensure the cost is allowable under the superannuation law. Examples of costs that aren’t allowable include remunerating trustees for certain duties.
“Remunerating trustees (or the directors of a corporate trustee) for any duties or services provided in their capacity as trustee/director is not permitted,” she said in a recent blog.
“In LCR 2021/2, the ATO describes these duties or services as ones where an obligation had been imposed on the trustee or director by laws such as the Superannuation Industry (Supervision) Act and Regulations or the Corporations Act, fiduciary conditions imposed under law (e.g. trust law), and the governing rules of the fund.”
Individuals will need to carefully consider when they are undertaking in their capacity as trustee, when the SMSF will breach the superannuation law if the trustee/director receives remuneration from the fund, and when the fund will have a NALI issue if the fund isn’t charged an arm’s length amount for the services, according to Ms Formica.
Common duties of SMSFs include opening a bank account to accept contributions/rollovers, preparing investment strategy and making fund investments.
Trustees will then need to consider the capacity in providing the service/performing the activity.
“Examples of trustee/director duties noted in LCR 2021/2 include accounting or bookkeeping services and preparation of the fund’s investment strategy,” Ms Formica explained.
“However, there are many factors which can indicate that the person is not acting in their capacity as trustee/director but rather in their individual capacity, such as the use of equipment and other assets and performing the activities pursuant to a licence or qualification.”
Insurance, subscriptions and ‘fair share’ of costs
Death or disability insurance over the members where the SMSF is not the owner of the policy is also not permitted, according to Ms Formica. This is because the fund will not benefit from the policy – if a successful claim is made, the proceeds would be paid to the policy owner, not the fund.
“Subscriptions to newspapers, software, internet etc where the members have the potential to benefit outside the fund are also not allowable,” she said.
“Is the purpose of the subscription solely to provide benefits to members on their retirement? Or is the trustee deriving a personal current day benefit?”
Ms Formica also noted that paying any more than the fund’s “fair share” of a cost is also not allowed.
“For example, if an adviser provides services to various entities within a family group, the fund should only pay for the services provided to the fund (and must generally pay for those costs or the fund risks NALI),” she explained.
Heffron explores more examples of the sort of expenditure that is inappropriate for an SMSF to pay in the new Education Bite “Common SMSF Outgoings”.
Tony Zhang is a Journalist at 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 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.