SMSF alert on potential to lose tax breaks

First published in the Financial Review on 04 January 2020.

DIY super fund trustees need to be aware of new legislation relating to a fund’s expenditure and income.
Some self-managed superannuation fund (SMSF) trustees are at risk of losing concessional tax benefits under new legislation.

Although the Australian Tax Office (ATO) is still consulting with the industry on how it will interpret the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, the legislative net could catch trustees who do their own accounts or improve an asset in their portfolio, such as an investment property. It could result in a tax rate of 45 per cent on taxable income the SMSF earns in a financial

The legislation was introduced to give more clarity around an SMSF’s non-arm’s length expenditure (NALE). The ATO wants to ensure all of a fund’s expenditure and income are at arm’s length.

Where trustees fail to follow these rules, tax penalties will be imposed on the income-producing assets involved with the expenditure. This includes distinguishing between personal and professional services that an SMSF receives.

Take, for example, SMSF trustees who use an accounting firm where they are employed to provide accounting services for their fund at no cost. From the ATO’s perspective, the SMSF has acquired the accounting services under a non-arm’s length arrangement.

Consequently, all the income earned by the SMSF in that financial year can be declared non-arm’s length and the trustee’s tax liability will be at their top marginal rate. To avoid this outcome, the SMSF must pay the market rate for the accounting services.

However, if SMSF trustees in their capacity as a “trustee” provide their own accounting services, then no fee must be paid and the fund does not lose its tax concession. These trustees must ensure they don’t use their firm’s equipment or assets and don’t lodge the annual return using their tax agent registration. As the trustee performs these duties in their capacity as an SMSF trustee, there is no requirement to charge the fund for this service.

If a trustee is providing a service to their fund that he or she also supplies commercially it may be best practice to charge market rate. 

What concerns the SMSF sector is both the potential for confusion around what is done in a trustee capacity as opposed to a professional one, and whether a trustee who does cross the NALE line should pay such a high penalty by having all the fund’s income declared non-arm’s length income (NALI) and taxed at the trustee’s top marginal tax rate.

It is argued that accounting fees are an expense incurred too late to produce or affect income and, as such, the penalty is out of kilter with the offence. In the same vein, other expenses such as legal, financial planning and advice fees occur too soon to be part of the income-producing process, and, as such, any infraction of NALE should be tempered by this fact.

Property also affected

It is not just professional services where there is confusion regarding the new legislation. It extends to specific services such as working on a property, so that any time a trustee uses their professional equipment pursuant to their professional qualification or licence for a fund-related activity, there is the potential to breach the non-arm’s length legislation and lose tax concessions, although, in this instance, the penalty is isolated to the specific income-producing asset (ie, the investment property).

Ultimately, if a trustee is providing a service to their fund that he or she also supplies commercially it may be best practice to charge market rates in the future.

The ATO appreciates there are grey areas when it comes to determining whether a service or transaction is at arm’s length and is genuinely working with the industry to provide more clarity.

Guidance needed

What might prove invaluable is to give SMSF trustees a guide of what are typical trustee services and therefore fall outside the scope of this legislation – and the tax penalties.

Such a list could include accounting, bookkeeping and related record keeping; managing general administrative tasks; broad financial investment advice; overseeing any investments or projects; representing a fund to the  Australian Prudential Regulation Authority, ATO, and the Australian Securities and Investments Commission; trustee governance services; and minor repairs to SMSF property.

It’s not the complete answer; as with much of tax law, there will always be ambiguity. But a guide stating typical trustee services would be a good starting point.

The new law is backdated to July 1, 2018, but the ATO has indicated that it will take a softer stance on compliance until the end of this financial year.


Opinion piece written by
John Maroney, 
SMSF Association