Edited version of private advice

Authorisation Number: 1052132378413

Date of advice: 26 June 2023

Ruling

Subject: Non-arm's length income expenses

Question

Are accounting services provided by the trustee of the Fund non-arm's length expenses in accordance with paragraphs 295-550(1)(b) and (c) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

1 July 2022 to 30 June 2023

The scheme commences on:

1 July 2022

Relevant facts and circumstances

The Fund is a self-managed superannuation fund (SMSF).

The directors of the Fund's corporate trustee (referred to as Trustees) are the members.

The Trustees are registered tax agents in their own right and operate their accounting business (the Firm) with no other employees.

The Trustees use the Firm's equipment and software to prepare the Fund's accounts and the SMSF annual return. The annual return is lodged using the Firm's computer and tax agent registration number via the ATO's Standard Business Reporting (SBR).

The Firm uses an unrelated auditor for all its SMSF clients and the Fund pays the same rate as other SMSF clients of the Firm.

The Trustees have stated that:

•         The Firm's software will not allow lodgement of the Fund's annual return without inserting a tax agent number.

•         It has always been the Trustees' intention to prepare the Fund's accounts and annual returns in their capacity as trustees.

•         The Trustees do not attend to the Fund's administrative duties during the Firm's work time and that this is generally done at home after hours.

•         As opposed to lodging a paper return or outlaying an expense for the Fund's own software, the Trustees believe the most cost and time effective approach is to lodge the Fund's annual return via the Firm's software.

•         The Trustees intend to document their intention to perform these duties and the reasons for using the Firm's tax agent number, in the trustee minutes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 295-550

We followed these ATO view documents

Law Companion Ruling LCR 2021/2: Non-arm's length income - expenditure incurred under a non-arm's length arrangement

Reasons for Decision

Non-arm's length income

Section 295-550 of the ITAA 1997 sets out rules as to when a complying superannuation fund will derive non-arm's length income.

Paragraphs 295-550(1)(b) and (c) of the ITAA 1997 provide that an amount of ordinary or statutory income will be non-arm's length income where:

b)    in gaining or producing the income, the entity incurs a loss, outgoing or expenditure of an amount that is less than the amount of a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm's length in relation to the scheme;

c)    in gaining or producing the income, the entity does not incur a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm's length in relation to the scheme.

Paragraphs 42 and 43 of Law Companion Ruling LCR 2021/2: Non-arm's length income - expenditure incurred under a non-arm's length arrangement provide guidance on trustee remuneration:

42.  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.[1] 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.

43.  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.

In certain cases, the trustee of a fund may undertake particular activities in performing its duties or choose to outsource those functions to third parties (for example, if the fund had 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 non-arm's length income 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.

In this case, the Trustees, who are qualified accountants, prepare the Fund accounts and SMSF annual return, and lodge the return using the Firm's tax agent number via SBR. The SMSF audit is outsourced to a non-related entity.

A trustee's duties will include a range of activities that can include bookkeeping and administrative functions. Trustees that do not have the appropriate skills will generally contract an agent to prepare the accounts and SMSF annual return. However, it is acknowledged that preparing the SMSF return for self-lodgement can fall within the trustee's duties and that some trustees have the relevant skills to perform this function. This is supported by paragraph 46 of LCR 2021/2:

46.  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.

Unless there are factors that suggest a contrary conclusion, the non-remuneration of a trustee will not necessarily enliven the non-arm's length expense provision. Example 6 of LCR 2021/2 reinforces this scenario:

54.  Leonie is a trustee of an SMSF of which she is the sole member. She is a chartered accountant and registered tax agent who is employed in an accounting and tax agent business. Leonie (in her capacity as trustee) prepares the accounts and annual return for the SMSF. She does not use the equipment or assets of her employer, nor does she lodge the annual return using her tax agent registration. As she performs these duties or services as trustee of the SMSF, she does not charge the SMSF for this work. The non-arm's length expenditure provisions do not apply as the duties or services performed by Leonie are in her capacity as trustee rather than under an arrangement in which parties are dealing with one another on a non-arm's length basis.

Use of related party equipment

The 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.

55.  Levi is the trustee of his SMSF of which he is the sole member. He is also a financial advisor and director of Levi and Co Financial Services Pty Ltd. Levi operates the business of Levi and Co Financial Services Pty Ltd from a commercial office and on regular occasions from his home. At home, Levi uses the computer and office equipment supplied by and paid for by the business.

56.  When at home, but not while working or billing clients, Levi undertakes the bookwork and occasionally makes online investments for his SMSF using the computer and office equipment supplied by the business.

57.  Levi performs these activities as trustee of his SMSF and does not charge the SMSF for this work. Levi's use of the computer and office equipment at home is minor and incidental in nature and will not, of itself, indicate that he is undertaking these services in any capacity other than as trustee for his SMSF.

Conclusion

The Fund's SMSF annual return has been lodged via the Firm's tax agent number using its equipment and software. These are factors that may indicate that the Trustees are performing these duties in their individual capacity as a tax agent.

The Trustees have stated that:

•         It has always been their intention to prepare and lodge the annual returns due to their professional skills.

•         The use of the Firm's equipment is only for this process and is outside the Firm's operating hours.

•         The only reason they use the Firm's tax agent number is due to the software requirement, and for the cost and time efficiencies.

Based on the information provided, it is reasonable to conclude that the Trustees are using their professional experience to provide services and duties in their capacity as trustee and that the use of the Firm's equipment is minor and irregular. Therefore, it has been determined that the accounting services provided by the Trustees do not result in non-arms-length expenses under paragraphs 295-550(1)(b) and (c) of the ITAA 1997.

1 See paragraphs 2.31 to 2.35 of the Explanatory Memorandum to the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019.

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