Being the trustee of an SMSF is a major responsibility. They have duties to fulfil under the super law (and also corporations law if the fund has a company as trustee). The fund’s governing rules (e.g. their trust deed) will impose obligations on them, and they have fiduciary responsibilities under trust law.
Some trustees/directors bring in professionals (e.g. accountants, administrators, financial advisers) to help them manage their SMSF and fulfil their duties. For others, their business, profession, life experiences or employment mean they have skills and knowledge that can help them in running their fund and they only bring in professionals for the things they don’t have the skills or time to do.
For example, if an SMSF had a real estate portfolio, the trustee may choose to manage the portfolio themselves or they may choose to contract the services of a real estate agent. Similarly, an accountant who is also the trustee of their own SMSF, may choose to undertake the accounting work for the fund themselves or they may choose to outsource those functions to others (including their own accounting practice).
If a trustee/director chooses to use their skills and knowledge in the running of their SMSF and do the work themselves, can they charge the fund a fee for their work? And if they can, should they?
Well, the super law specifically prohibits trustees/directors from receiving any remuneration from the SMSF (or anyone else) for the duties or services they perform in their capacity as trustee.
So, what are the sorts of things a trustee might do for their SMSF that they can’t charge their fund a fee for?
Examples of these “trustee duties” include (but are not limited to):
- Accepting contributions and rollovers for members.
- Formulating, implementing and regularly reviewing the fund’s investment strategy.
- Making fund investments.
- Administrative duties in relation to the fund’s investments (e.g. collecting rent, paying expenses, renegotiating lease agreements, inspecting properties).
- Minuting trustee/director decisions.
- Maintaining a cash book for the fund and reconciling the fund’s transactions.
- Preparing the fund’s financial statements and SMSF annual return.
If a trustee/director does these sorts of things themselves (rather than outsourcing the work to others), they can’t charge their SMSF a fee for their work – the super law prohibits it.
The examples above seem clear-cut, but sometimes it can be difficult to determine whether a trustee is acting in their capacity as trustee or some other capacity when they are doing work for their SMSF. In the ATO’s view, indicators an individual might not be acting in their capacity as trustee include where:
- The individual uses the equipment or other assets of their business, profession or employment (e.g. tools of trade, computer equipment) in a material way.
- The individual performs activities pursuant to a licence or qualification and the activity can only be performed because the individual or their business holds the relevant licence and/or qualification.
Take the example of a plumber who uses their tools of trade to renovate the bathroom and kitchen of a rental property owned by their SMSF. Or an accountant who prepares their fund’s financial statements using their home computer but lodges the SMSF annual return using their tax agent software so the return can be lodged electronically.
Have these activities been performed in their trustee capacity or some other capacity?
It will depend on the relevant facts and circumstances. Whilst the ATO’s view on trustee capacity versus non-trustee capacity is still relatively new (LCR 2021/2), already we’ve seen a number of SMSF trustees applying to the ATO for a private binding ruling so they have certainty over their situation.
Why are SMSF trustees so concerned?
It’s because, if an individual is not acting in their trustee capacity when doing work for their SMSF, two complexities arise.
Firstly, the tax law says they need to charge their fund market rates for their work or face additional tax. The amount of this additional tax depends on the nature of the services provided but, in the example of the plumber above, it could be 45% of the rent and capital gains from the property.
Secondly, whilst the tax law says fees should be charged, the super law prohibits fees being charged unless the trustee is doing this work in the ordinary course of a business they carry on performing similar duties or services for the public.
Unfortunately, we’ve seen many cases where a trustee will hold a licence and can provide services to their SMSF but, because they don’t offer those services to the public personally, the super law says they can’t charge their fund a fee for those services. But the tax law penalises them for not charging. A very good example of the phrase “to be caught between a rock and a hard place”.
