How to Avoid Non Arms Length Penalties
Self-managed super funds (SMSFs) offer a level of control and flexibility that many individuals find attractive. They allow you to take charge of your retirement savings, making investment decisions and even managing aspects of the fund’s operations yourself.
However, with this autonomy comes a layer of complexity, particularly around what activities trustees can perform themselves versus what they can charge a fee for, especially when it involves “mates rates” or related-party transactions.
Understanding the distinction between trustee duties and professional services is essential to avoid potential compliance issues, particularly those surrounding non-arm’s length expenditure. This article explores what you can and cannot do as a trustee of your SMSF, the responsibilities that come with DIY fund management, and the dangers of breaching the non-arm’s length income (NALI) and expenditure (NALE) rules.
What Are SMSF Trustee Duties?
As a trustee of an SMSF, your primary responsibility is to ensure the fund is managed in compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act) and other regulations. The role of a trustee comes with several obligations that are considered part of your duty to the fund. These include:
- Managing Investments: Trustees are responsible for managing the SMSF’s investment strategy, including making decisions on where and how the fund’s assets should be allocated. This is a key part of trustee duties and can be done without incurring additional costs to the SMSF.
- Record-Keeping: SMSF trustees must maintain proper documentation and records related to the operation of the fund. This includes financial records, minutes of meetings, and tax returns. Managing these tasks yourself is part of your obligations and cannot be charged as a service.
- Fund Administration: The day-to-day administrative tasks such as organising meetings, ensuring compliance with regulatory changes, and lodging annual returns are all considered trustee duties. Doing this yourself, or even with the help of other trustees, is part of your role and should not attract any fees.
- Lodging Reports and Returns: Trustees must lodge an annual return for the fund, which includes income tax reporting, regulatory information, and compliance details. While you can handle this task on your own, many trustees opt to engage an accountant or professional SMSF administrator.
What SMSF Trustees Can Charge a Fee For
While trustees cannot charge for performing their basic duties, there are some circumstances where individuals may have the skills to perform services that go beyond the standard trustee obligations.
However, even in these instances, caution is required to ensure compliance with non-arm’s length provisions.
- Professional Services: If you are a qualified professional (e.g., an accountant, financial planner, or lawyer) and provide services to your SMSF in this professional capacity, you may charge a fee for these services. For example, preparing financial statements or tax returns, providing legal advice on trust deeds, or handling complex investment transactions could be areas where fees are justified and even expected.
However, these services must meet the same criteria as those offered to any other client. That means the work should be at a commercial rate, and the terms should be transparent and aligned with normal industry standards. Charging “mates rates” or significantly discounted fees could potentially trigger non-arm’s length income rules, exposing your fund to hefty tax penalties.
- Specialist Tasks: Trustees may outsource specialist tasks, such as investment management or legal services, and the individuals or firms providing these services can charge for their work. These must be documented correctly, and the services must be conducted on an arm’s-length basis to ensure compliance.
What SMSF Trustees Cannot Charge For
- General Fund Administration: Basic administrative tasks related to running the SMSF cannot attract fees.
- Management of Fund Investments:
While trustees can make decisions about investments, they cannot charge the fund for their time or expertise in doing so. - Compliance Monitoring: Ensuring that the fund remains compliant with all regulations is a core part of the trustee’s role and cannot be billed as a service.
- Day-to-Day Operations: Tasks like paying bills, organising meetings, or maintaining records must be done without any remuneration.
The Risks of Non-Arm's Length Expenditure (NALE)
Non-arm’s length expenditure (NALE) and income (NALI) rules exist to prevent trustees from gaining an unfair tax advantage by engaging in discounted or subsidised transactions. When trustees provide services at below-market rates (including “mates rates”), or even for free in some cases, it can lead to the application of these rules.
If your SMSF is found to have incurred NALE, any income generated from that expenditure will be considered non-arm’s length income and taxed at the highest marginal tax rate of 45%, rather than the standard concessional rates for superannuation funds. This can result in a significant financial penalty, eroding the fund’s value and affecting your retirement savings.
How to Avoid NALE Breaches
- Market Rate for Services: If you provide a professional service, ensure that you charge the same rate you would charge any other client. This applies even if the SMSF is your own.
- Documentation: Always maintain thorough records, including service agreements, invoices, and any other documentation that shows the terms of your services are consistent with industry standards.
- Seek Professional Advice: When in doubt, it’s advisable to consult with SMSF specialists or financial advisors to ensure that your fund remains compliant with all relevant rules and regulations.
Managing an SMSF can be a rewarding yet complex undertaking. While trustees can save money by taking on various tasks themselves, it’s crucial to differentiate between trustee duties and professional services. Charging for services that fall under trustee obligations is not permitted and offering discounted or non-arm’s-length services can lead to significant tax penalties under the NALE rules. To ensure compliance and protect your retirement savings, always adhere to arm’s-length principles and consult a professional when necessary.
By following these guidelines, you can confidently manage your SMSF and avoid the pitfalls that may come with non-arm’s-length transactions.
How can Walsh Accountants help?
At Walsh Accountants, our SMSF Division is here to guide you through the complexities of managing your fund while ensuring compliance with all regulatory requirements.
We understand that the rules surrounding trustee duties and non-arm’s length expenditure can be confusing. Whether you need help preparing financial statements, lodging returns, or ensuring that your transactions adhere to arm’s-length principles, we offer tailored services to meet your needs.
Our SMSF Specialist Jared Alford can help you navigate these rules with confidence, ensuring your fund is not only compliant but also optimised for your long-term financial success.
If you would like to explore the services and support Jared is ready and willing to provide to you, contact us today on 07 5592 3644.
Article By Jared Alford
Jared Alford– SMSF Specialist
I work with clients that are exploring the world of Self-Managed Super Funds by providing technical and administrative support along with strategy implementation.
Self-Managed Superannuation Funds aren’t just about managing wealth, they are about empowering individuals to take control of their financial future.
