SMSF members in pension phase who are receiving advice should be cautious about personally paying for that service as it may breach the non-arm’s-length expenditure (NALE) provisions, a technical expert has warned.
Heffron senior SMSF specialist Annie Dawson said a NALE issue can arise where an adviser provides services to an SMSF in pension phase, but does not invoice the fund as it cannot get a deduction for the fee, but charges the members instead, who can claim a deduction.
Dawson added that even though the adviser is not a related party, that may not negate the NALE problem and the main consideration was to look at the type of services being provided.
“When the adviser is giving advice about the suitability of being in pension phase, cost of living and cash-flow projections, it could be appropriate to apportion some of that service as advice to the member and distinguish it from services provided to the fund,” she said.
“If the adviser is maintaining a portfolio of investments for the fund, it’s going to be problematic to justify not invoicing the fund because it is receiving services relevant to it.
“That’s the starting point – who’s getting the service and if the fund is receiving a service but is not charged for it, that’s when you ask: ‘Do I have NALE?’”
She pointed out NALE usually required three elements to combine, which was the SMSF and another party not dealing at arm’s length, services being provided to the fund that have a connection with part or all of its income, and the amount being charged for those services is less than what is expected in an arm’s-length situation.
“We would normally expect an entity, like an SMSF, to pay for the services it receives, but the members paying for them wouldn’t be consistent with an arm’s-length dealing,” she noted.
“NALE essentially squashes exempt current pension income, so you can’t say: ‘I don’t have a problem because the SMSF is now a pension fund.’ The rules don’t work that way.”
