Newsletter No. 12, December 2013

SMSF Trustees performing services for their SMSF 

If you are a trustee of your Self Managed Superannuation Fund (SMSF) think twice before performing services for your SMSF. You may think you are saving money doing the job yourself, but you could be making a contribution to your SMSF.

Under the law, SMSF trustees cannot receive remuneration from their SMSF to perform their duties.   However, an individual trustee or a director of a corporate trustee can be paid provided that:

  • they provide a service other than in the capacity of trustee/director of the corporate trustee;
  • they are appropriately qualified and licensed to provide the service;
  • their services are ordinarily provided to the general public through a business, and;
  • the payment is no more favourable to the individual than if it were made on an arm’s length basis in the same circumstances.

Therefore, individual trustees and directors of corporate trustees can be employed by their SMSF to undertake non-trustee activities for their SMSF and receive payment.

You must be supplying those services to the general public. You cannot just be qualified in a particular trade or profession.

The reasoning behind this law is it stops SMSF members from accessing their retirement savings before they are entitled to them.

So if you are a qualified builder and provide services to the public, your SMSF can pay you a fee at the market rate for carrying out repairs or improvements to a property owned by it.

Similarly, if you are an accountant who prepares financial accounts and annual tax returns for the public then your SMSF can pay you for your professional services provided to it.

One area of the superannuation law where you may encounter problems with paying a member for professional services is the ATO’s view on contributions as well as the contribution limits.

If for example, you performed professional services for your SMSF for free, then the arm’s length amount it would normally cost your SMSF may be treated as a contribution to your SMSF. You could exceed your contribution limits if you hadn’t been keeping an eye on them.

People need to be especially careful when renovating and improving an SMSF’s property.

Take for example, an SMSF member renovates a residential property owned by their SMSF.  The SMSF member provides materials (worth $20,000) and their labour (worth $5,000) free.  Let’s assume that the market value of the SMSF’s property once the renovation is completed has increased in value by $80,000.

Now how would the Australian Taxation Office (ATO), treat this situation?

The word “contribution” is not defined in the superannuation law.  So the ATO has expressed its view in Taxation Ruling 2010/1 (TR 2010/1) which states that a contribution is “anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general “.

TR 2010/1 also expresses the view that the fund’s capital may be increased when a person increases the value of an asset of the fund, for example, by making improvements to the asset.

The ATO’s view is that if a member of an SMSF provides the materials used to make an improvement to an SMSF’s property at no cost and supplies labour free of charge, the resulting increase in the value of the property will increase the capital of the SMSF.

Therefore, the contribution to the SMSF is made by way of improvement to the asset rather than the provision of materials, and supply of labour.  It is the improvement that constitutes “the thing of value” which increases the capital of the SMSF and may be considered a contribution.

Therefore, the ATO would consider that the value of that contribution would be equal to the value of the improvement which in our example is $80,000 and not simply the value of materials and labour which was costed at $25,000 and supplied for free.

I should point out that the supply of the materials to the SMSF is also prohibited under section 66 of the superannuation law, but that issue is covered in my February 2013 newsletter.

Saving your SMSF some money might seem like a good idea, but if you are acting in your professional capacity free of charge just be aware it might be classed as a contribution to your SMSF.

Monica Rule worked for the ATO for the past 28 years and is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.