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One of the key restrictions applicable to all members of self-managed super funds (SMSFs) is the prohibition on being paid for the services you provide to your fund as a trustee. This is a restriction imposed by legislation and therefore an important issue that SMSF auditors will review in their annual audit process.
What seems to be less widely known is that separate legislation specifically allows remuneration for ‘non-trustee’ services that are provided to an SMSF by a fund trustee, so long as certain conditions are met.
It is therefore important to identify and understand the difference between trustee and non-trustee services (professional services).
Differentiating between services
When differentiating between trustee services and professional services, we need to look at the capacity in which the services are being provided by the individual.
Trustee services would generally include those imposed under legislation, regulations or even by the funds Trust Deed. For example, carrying out the administration obligations for an SMSF would be seen as a trustee service and therefore the restriction on being paid for these trustee services would apply. Charging your SMSF for these administrative trustee services would be in breach of the trustee remuneration rules.
In contrast, professional services that you carry out for your SMSF are not seen as trustee services. For instance, consider a SMSF where a trustee is a tradesperson who completes extensive renovation work on a rental property that is owned by their SMSF. The trustee would complete that work in a professional capacity, as a professional service to their fund. As these services are carried out in a professional capacity, the restriction on remuneration for trustee services would not be applicable.
The following would be typical examples of trustee services:
- Operating the fund’s bank account by way of accepting contributions and paying fund expenses
- Preparing, implementing and reviewing the SMSF investment strategy
- Paying members’ benefits from the fund
- Maintaining fund records and appropriate documentation
- Arranging for the SMSF financial statements to be prepared
- Arranging the SMSF annual audit
- Responding to queries from professional service providers and/or the ATO.
In most cases, the following would be seen as non-trustee services to the SMSF:
- A service provided where a licence to carry out that service is required, such as a builder’s licence
- A service provided to an SMSF where the service provider is covered under an insurance policy for the work that they are carrying out
- Where the service provider is required to use equipment or assets that they own and use in their regular business operations.
Requirements for remuneration
There are four requirements that must be satisfied to allow remuneration for non-trustee services. These requirements are:
- The trustee performs the duties or services other than in the capacity of trustee
- The trustee is appropriately qualified and holds all necessary licences to perform the duties or services
- The trustee performs the duties or services in the ordinary course of a business, carried on by the trustee, of performing similar duties or services for the public
- The remuneration is no more favourable to the trustee than they could reasonably expect to pay if they were to deal with a relevant service provider at arm’s length in the same circumstances.
Attention should then be given to the operation of the superannuation rules that cover related party transactions. Where payments are made between an SMSF and a related party, the rules around arm’s-length dealings become even more important.
The arm’s-length rules require that all transactions and dealings with the fund be carried out on the same terms and conditions that would apply if dealing with a party who is not connected or related.
A transaction carried out on terms that favour the SMSF, for example charging the fund below market rates for the roof repairs, will create a tax issue for the fund and can result in non-arm’s length income. This means that any income the fund receives in relation to the asset will be subject to tax at the highest rate of 45%.
Transactions carried out on terms that favour the service provider, for instance charging the SMSF above market rates, will result in a specific breach of the legislation under section 109 of the SIS Act and extensive fines can be levied on the trustees of the fund personally for those breaches.
Given the financial penalties that can apply, it’s important to not only transact on arm’s-length terms but to make sure you obtain and retain evidence to show how the terms of the arrangement were determined.
This evidence would usually include copies of quotes from the service provider, invoices for the work carried out and a trustee minute (resolution) confirming that all parties are acting on arm’s-length terms.
In most instances, the SMSF fund auditor would expect to sight the above documentation.