Advisers with SMSF clients who do not use a real estate agent may run into issues with non-arm’s-length income (NALI) due to the lack of clarification in a bill currently before Parliament and therefore must inform clients of this possibility, an industry lawyer has warned.
The Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill, currently still sitting in the Senate, proposes to amend the NALI provisions to ensure complying super entities cannot circumvent the NALI rules by entering into schemes involving non-arm’s-length expenditure, including where expenses are not incurred.
During DBA Lawyers’ latest SMSF Online Update, special counsel Bryce Figot outlined one example of how SMSFs could be affected by NALI where the trustee owns residential real estate with a long-term tenant.
In order to save paying 5.5 per cent to a real estate agent, the trustee personally liaises with the tenant, organises repairs and maintenance, and negotiates rent increases.
In this scenario, the saving of 5.5. per cent gross probably would not cause NALI for the SMSF.
“But we certainly can’t definitely rule this out,” Figot warned.
The explanatory memorandum (EM) for the bill states in certain cases the trustee may undertake particular activities in performing its duties or choose to outsource those functions to third parties, for example, if the fund has 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 NALI 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 EM said.
“As a general rule, the trustee of an SMSF is prevented from charging for the services or functions that it undertakes in its capacity as a trustee. If the trustee is instead providing services that are procured as a third party, the NALI rules are intended to apply.”
Commenting on this aspect, Figot said: “This raises the question: where do ‘services that are procured as a third party’ start and stop? These are ambiguous terms.
“I actually wouldn’t have thought to rate this as contentious because it’s so wide and it’s so common.”
He warned while the EM flags this situation, it does not properly address Treasury’s position and thus clients need to be informed.
“It says ‘maybe’. Presumably, minimal attendances are fine, but I think ATO clarification would be good, especially if the legislation is passed, we would definitely advocate for it, but in a practical sense we need to disclose this with clients,” he said.
“So if you’ve got SMSF clients that own real estate and don’t use real estate agents, a disclaimer would be good.
“I think we should be writing to our clients that we’ve got this bill and if you aren’t using a real estate agent, we can’t say for sure that there won’t be an issue.
“It’s such a widespread practice, but we need to be on the front foot.”