Superannuation law does not contain definitive guidance regarding the services SMSF trustees can perform as a related party to a unit trust in which their fund is invested, according to a legal specialist.
DBA Lawyers senior associate William Fettes pointed out both the Superannuation Industry (Supervision) (SIS) Act and Law Companion Ruling (LCR) 2021/2 were clear on the use of related party services by an SMSF, but were limited in scope when a unit trust was involved.
“Sections 17A and 17B [of the SIS Act] are the legislative provisions that deal with the definition of a self-managed fund, but they don’t apply to unit trusts,” Fettes told attendees of a DBA Lawyers webinar he hosted on Friday.
“The concept of trustee versus personal services, if you read it carefully, doesn’t always make sense when you’re trying to look at it from the point of view of the unit trust as a separate entity.
“This difficulty was posed to the ATO in feedback on the drafting and revision [of LCR 2021/2] and there were many revisions of the law companion ruling.
“[Some of the feedback] asked for further clarification, asked for examples where there’s a unit trust that owns real estate, and whether we treat it in a similar type of way where we’re looking at trustee type services, and the actual response was negative.
“‘Sorry, we don’t accept that’, said the ATO. [It said] essentially we consider the ruling provides sufficient guidance on the key principles to assist trustees to determine how the provisions apply.
“Respectfully, that’s not the case, I don’t think when reading the LCR you get an entirely clear picture of the situation with unit trusts. It has quite a lot of commentary in it, but some of it doesn’t really transpose from the SMSF doing the investment to the unit trust,” he stated.
While performing related party services for a unit trust is not explicitly barred, he warned trustees could still risk breaching the non-arm’s length expenditure and income rules if they choose to proceed with this course of action.
“Related party services to a unit trust do involve risk, [so you need to] think about and ask challenging questions of the client,” he noted.
“Can we prove everything that ought to have been charged for, was [charged for] and that any charges were arm’s length? How does this related party entity usually quote for and charge for their services with arm’s length clients of their own?
“My advice is do not proceed with the arrangement of related party services if you can’t get satisfactory answers to these questions or you don’t have confidence that what you tell the client is really going to be observed and followed.
“It’s generally going to best to just engage independent contractors who are going to be dealing at arm’s length to do whatever is necessary,” he said.
