Director payment presents a fine line to tread
One of Australia’s leading cases on lost trust deeds also offers a lesson in another element of SMSF administration, says a legal expert.
Bryce Figot, special counsel at DBA Lawyers, said the case Application by Ellasil Pty Ltd [2023] VSC 6 is often thought of as one of the pre-eminent lost deed cases but that it also set a precedent in regard to the payment of directors of a trustee.
In fact, Mr Figot said it was the first and only instance where the issue of whether an SMSF could legally pay a director who was also a solicitor.
In the case, the executor of the deceased estate, who was also a solicitor, became a director of the corporate trustee and charged the fund for work that he conducted on its behalf.
Generally, Mr Figot said no one is allowed to pay a director of an SMSF, however, there is a limited exception under section 17B [of the Superannuation Industry (Supervision) Act] which states this rule would not apply if directors are performing duties or services “other than in the capacity of a director”, are appropriately qualified and hold all necessary licences to perform such duties or services.
It also states directors must perform those duties or services in the ordinary course of a business performing similar duties and services for the public and the remuneration must be at arm’s length.
“In this case, Justice McMillan noted that directors are allowed to charge for services to an SMSF under section 17B,” Mr Figot said.
“The court accepted that the solicitor, who was a director and an executor, provided professional services as a solicitor and solicitor services met those requirements. So [the exemption in] section 17B applies, but not for everything [the solicitor did].
“[Justice McMillan] decided to the extent that the solicitor has charged the SMSF for communicating with the fund’s accountants, reviewing a trustee declaration or organising the sale of shares and reviewing investments, [then] no, that work is not something he is allowed to charge for. That’s not professional work, that’s trustee work.”
Mr Figot said the ATO also notes in LCR2021/2 that there several features that also apply to when professional services can be charged in regard to arm’s length rules including whether the work falls under the director’s professional indemnity insurance.
“In terms of arm’s length regulations, say this was applied to a plumber who also was involved in an SMSF, he would want his work to be done under insurance,” Mr Figot said.
“It’s also important to note things like did the contractor in question do things such as use tools from their own business, whereas in this case, we’re not sure what the solicitor used for the sales of shares. Where does his expertise fit in?”
“This is the important point: if you agree to be an executor for a client that has an SMSF, you might become a director or trustee of their SMSF, and then you might end up doing a lot of work for free that you cannot charge for.”
