SMSFs cautioned on NALI risks with trustee services for unit trusts

“Anything that goes beyond normal trust oversight and management could be seen as the provision of services other than in the capacity as a director of a UT trustee,” he cautioned.

Mr Backhaus explained that in LCR 2021/2, the Commissioner outlined his view that while duties carried out in the capacity of a trustee of an SMSF would not give rise to non-arm’s length income (NALI), services carried out other than in the capacity of a trustee could.

This raises questions around what level of services are able to be provided to a unit trust that an SMSF invests in, without giving rise to NALI, he said.

Many SMSFs invest in unit trusts, and some SMSF members may be directors of the unit trust trustee, he noted.

“Naturally, a director of a UT trustee will have similar obligations as those referred to under paragraph 44 of the LCR to manage and oversee the investments of the trust,” he said.

Paragraph 44 of the LCR makes it clear that a trustee or director of a corporate trustee of an SMSF will be required to perform particular actions in order to satisfy obligations imposed on them. This includes any conditions imposed by a statute such as the SISA and the Corporations Act 2001, any fiduciary conditions imposed under the law, and any duties or obligations imposed under the trust deed of the SMSF. 

The types and extent of duties, Mr Backhaus said, would also depend on the types of investments being carried on in the unit trust, with something like property development requiring closer oversight and management than a unit trust that holds only long-term equity investments.

“It would generally be accepted that providing services to a unit trust trustee that go beyond those provided in a trustee/director capacity without being remunerated could lead to an application of the NALI provisions to income an SMSF receives from the unit trust,” he stated.

“Although there is currently no ATO commentary on this, it could be presumed that similar rules apply to the level and types of services that a director of a UT trustee can provide without having NALI implications.”

The examples provided in the LCR relating to SMSF trustee services, Mr Backhaus said, help to shed some light on what the Commissioner would consider going beyond trustee services, he stated.

“Example 9 of the LCR gives the example of Trang who provides handyman/builder like services to an SMSF without remuneration and is considered to provide these services in her personal capacity, leading to NALI implications for her SMSF. Similarly, any director of a UT trustee that provided these sorts of services to a unit trust without remuneration may cause income an SMSF receives from the unit trust to be NALI,” he warned.

“Also, it is likely that even where these non-trustee services are carried out by directors of a UT trustee who are not SMSF members, or associates of SMSF members, could bring about similar NALI risks for SMSF investors in unit trusts.

“The implications of the NALI provisions continue to give rise to complexity and uncertainty. SMSFs investing in unit trusts should check for NALI risks and, if there is any doubt, seek advice to minimise the risk of invoking these provisions.”