NALI and trustee services – what about unit trusts?

By Shaun Backhaus on 15/03/2022 in ATO, Investments, SMSF compliance, SMSF strategy, Taxation, Trustee education

In LCR 2021/2 (LCR), the Commissioner outlined his view that while duties carried out in the capacity of a trustee of an SMSF would not give rise to non-arm’s length income (NALI), services carried out other than in the capacity of a trustee could.

This raises the question, what level of services are able to be provided to a unit trust that an SMSF invests in, without giving rise to NALI?

SMSF trustee services

Some of the relevant comments provided in the LCR are as follows:

Capacity in which activities are performed – self-managed superannuation funds

In the context of SMSFs, it may be necessary for an individual to ascertain whether they are performing an activity as a trustee of the superannuation fund or whether they are acting in a different capacity. …
…
Given the statutory restrictions that prevent a trustee or director of a corporate trustee from receiving remuneration, paragraphs 295-550(1)(b) and (c) will not be enlivened due to the trustee or director not charging for the services performed in relation to the fund when acting in a trustee capacity. For example, the non-arm’s length expenditure provision will not apply where a trustee, acting in that capacity, performs bookkeeping or accounting services for the fund for no remuneration.
However, when the trustee or director of a corporate trustee operates in another capacity and either does not receive remuneration for those services or receives remuneration in accordance with the exceptions in section 17B of the SISA, paragraphs 295-550(1)(b) or (c) may apply where the fund incurs non-arm’s length expenditure.
A trustee or director of a corporate trustee of a SMSF will be required to perform particular actions in order to satisfy obligations imposed on them, including:
- any conditions imposed by statute (for example, the SISA and the Corporations Act 2001),
- any fiduciary conditions imposed under the law, and
- any duties or obligations imposed under the trust deed of the SMSF.
The trust deed of the SMSF may also provide the trustee or director of the corporate trustee the power to perform certain actions.
An individual’s business, profession, life experiences or employment may result in the individual having skills and knowledge that can assist the individual perform their duties in their capacity as trustee, or as a director of a corporate trustee, of a SMSF. Utilising such skills and knowledge of itself does not indicate that the individual is not acting in their capacity as trustee or as a director of a corporate trustee. For example, a financial adviser who is a trustee of a SMSF can utilise their skills and knowledge in deciding the investment strategy of the SMSF in their capacity as trustee.
In the context of applying paragraphs 295-550(1)(b) and (c), it is appropriate to presume that an individual is acting in their capacity as a trustee, or director of a corporate trustee, where the actions are consistent with a duty, obligation or power referred to in paragraph 44 of this Ruling, unless there are factors that suggest a contrary conclusion. Factors that indicate that the individual is performing their activities in their individual capacity and not in their capacity as a trustee, or a director of a corporate trustee, include:
- The individual charges the complying SMSF for performing the services. However, there can be circumstances where the individual can be acting in their individual capacity even though they do not charge the SMSF for performing the services.
- The individual uses the equipment and other assets of their business, or equipment and other assets used in their profession or employment in a material manner. However, minor, infrequent or irregular use of equipment or assets will not, of itself, indicate the individual is acting in their individual capacity. For example, in the absence of any other factor indicating otherwise, minor, infrequent or irregular use of a business computer at the office by an individual would not, of itself, indicate the individual is acting in their individual capacity.
- The individual performs the activities pursuant to a licence and/or qualification relating to their business, or their profession or employment. That is, the activity can only be performed due to the individual or business holding the relevant licence and/or qualification.
- The activity is covered by an insurance policy relating to their business, or their profession or employment (for example, indemnity insurance).

Application to unit trusts

Numerous SMSF trustees invest in unit trusts and some SMSF members may be directors of the unit trust trustee (UT Trustee). Naturally, a director of a UT Trustee will have similar obligations as those referred to under paragraph 44 of the LCR to manage and oversee the investments of the trust. The types and extent of duties would also depend on the types of investments being caried on in the unit trust, with something like property development requiring closer oversight and management than say a unit trust that holds only long-term equity investments.

It would generally be accepted that providing services to a UT Trustee that go beyond those provided in a trustee/director capacity without being remunerated could lead to an application of the NALI provisions to income an SMSF receives from the unit trust. Although there is currently no ATO commentary on this, it could be presumed that similar rules apply to the level and types of services that a director of a UT Trustee can provide without having NALI implications.

The examples in the LCR relating to SMSF trustee services shed some light on what the Commissioner would consider going beyond trustee services. Example 9 of the LCR gives the example of Trang who provides handyman/builder like services to an SMSF without remuneration and is considered to provide these services in her personal capacity, leading to NALI implications for her SMSF. Similarly, any director of a UT Trustee that provided these sorts of services to a unit trust without remuneration may cause income an SMSF receives from the unit trust to be NALI.

Also, it is likely that even where these non-trustee services are carried out by directors of a UT Trustee who are not SMSF members (or associates of SMSF members) could bring about similar NALI risks for SMSF investors in unit trusts.

Conclusions

SMSFs that invest in unit trusts must be very careful of any services that may be provided to a UT Trustee. Anything that goes beyond normal trust oversight and management could be seen as the provision of services other than in the capacity as a director of a UT Trustee.

The implications of the NALI provisions continue to give rise to complexity and uncertainty. SMSFs investing in unit trusts should check for NALI risks and, if there is any doubt, seek advice to minimise the risk of invoking these provisions.

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NALI and trustee services – what about unit trusts?

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Application to unit trusts

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