Earlier this year, the government released draft legislation on non-arm’s length income aimed at rectifying a “technical deficiency” in the current provisions for NALI, whereby non-arm’s length expenses result in the income not being treated as NALI as intended. The bill is currently before the Senate.
Speaking at a seminar in Sydney, DBA Lawyers special counsel Bryce Figot said the explanatory memorandum for the bill goes into some granular detail about NALI.
The explanatory memorandum states that in certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties; for example, if the fund had a real estate portfolio, the trustee may be able to manage the properties or contract the services of a real estate agent.
“The question of whether the non‐arm’s length income rules apply in respect of services or functions that are undertaken by the trustee depends on the capacity in which the trustee undertakes those activities,” the explanatory memorandum states.
Mr Figot said this suggests that the SMSF member “can perform these services for free if they are acting in their capacity as trustee”.
However, he said the new NALI provisions raise some important questions for SMSF trustees who want to undertake real estate developments via their SMSF and whether they are remunerated for certain services.
Mr Figot gave the example of Kell who is a builder and runs his own company. The SMSF wants to acquire real estate and build two town houses and then sell them, he explained.
While, generally, trustees or directors of trustees can’t be remunerated, section 17B gives a bit of carveout and provides that SMSF trustees or directors can be remunerated if: they perform duties or services other than in capacity as trustee, they are appropriately qualified, they perform similar duties or services in the ordinary course of a business and the remuneration is no more favourable than if it were dealing at arm’s length in the same circumstances, he explained.
Therefore, the SMSF may want to acquire all physical items directly from third-party vendors and remunerate companies, so that the SMSF has still paid an arm’s length for services, in order to keep everything as simple as possible, he said.
“So hopefully, everything Kell does, he can be paid for, so the amount by which the fund is out of pocket is an arm's length amount,” he said.
There may, however, be services that Kell wants to provide for the property development for free, he said.
“The question is, can he perform those services for free if he’s acting in his capacity as trustee?” Mr Figot said.
“Now, hopefully, they’re very minor services and so it may not be an issue, but if they start to become major you really want to be remunerated,” he explained.
“The ATO may look at that and say that personal exertion is not being paid for. If you want to be vanilla, you want to pay them on a non-arm’s length amount — that is the vanilla answer.”