In the main, the views expressed by the ATO in the final version are the same as in the earlier drafts. For example:
- Where someone other than the trustee of an SMSF (or a director of the fund’s corporate trustee) provides services to the fund, the fund must be charged an arm’s length price for those services. If it isn’t, and the price charged is less than what would have been expected in an arm’s length situation, the fund will have non-arm’s length expenditure (NALE).
- If an SMSF’s NALE relates to a particular fund asset or assets (i.e. a specific expense shortfall), depending on the situation, all future income from that asset (including any capital gains on disposal of the asset) will be taxed at 45 per cent.
- However, if the trustee of an SMSF (or a director of the fund’s corporate trustee) provides services to the fund, whether the SMSF needs to be charged for those services depends on the capacity in which they were performed. If the trustee is acting in their trustee capacity (i.e. doing things required of them under super law, the fund’s deed, general trust law), then the super law prohibits the trustee from being remunerated, and so the NALI provisions won’t apply.
But in a pleasing departure from the draft, the ATO now provides a concession where the trustee of an SMSF provides services to the fund in their individual capacity (e.g. the services provided were not trustee duties or there were factors indicating they were performed other than in their trustee capacity, such as material use of business equipment etc). In this case, if the super law prohibits the trustee from being remunerated, then the NALI provisions won’t apply.
When would a trustee be prohibited from being paid for their non-trustee services?
SMSF trustees (and the directors of a corporate trustee) can be remunerated for non-trustee services but only if:
- They are appropriately qualified and hold any necessary licences to provide those services.
- The services are performed in the ordinary course of a business carried on by the trustee.
- The business offers similar services to the public.
If all three of these criteria are not met, the trustee can’t be paid for their services. The super law prohibits it.
For example, Max is a retired builder and trustee of his SMSF. He uses his building skills to renovate the kitchen in a property owned by the fund. Max is likely to be acting in his individual capacity when providing the kitchen reno – it’s hardly a duty of a trustee. But the super law says Max can’t be paid for his services. Even if he was appropriately qualified and licensed, he’s not offering similar services to the public (he’s retired).
Under the earlier versions of LCR 2021/2, Max was effectively stuck between a rock and a hard place. The super law said he couldn’t be paid for his services, but technically, the NALI provisions applied if he didn’t. Thankfully, in the final version of LCR 2012/2, the ATO now accepts that the NALI provisions shouldn’t, and won’t, apply to scenarios like Max.
But, it’s not all clear sailing for Max.
If his renovations have improved the value of the property, he’s made a contribution to super. And the amount of that contribution is the increase in the value of the property, not the value of the work done. That might be fine if Max is under 75 and has plenty of room in his non-concessional cap.
But what if Max is too old to make contributions to super? Or it causes him to exceed his cap?
In that case, all the normal rules would kick in.
Ineligible contributions would need to be refunded, and excess non-concessional contributions would need to be removed from super once a release authority was issued. Potentially problematic if Max’s fund doesn’t have the cash to do so.
There’s lot more learnings to unpack from the ruling, but we’ll save those for another day.
