Let’s say your SMSF owns a residential rental property and the property needs a fence. You’re a builder and can build the fence. Can you
charge the SMSF for the fence? The answer is maybe.
What you charge and how it is charged is critically important here.
If the fund acquires the fencing material, and is invoiced by the building business to construct the fence, and pays a market rate for the
labour involved, then there is unlikely to be a problem as the charges are transparent and at market value. However, documentation is
essential and you may also need to verify that the labour cost charged is the market rate.
However, if the business decides to install the fence for no charge, or alternatively charge an excessively high rate, then the transaction
could be deemed to be non-arm’s length.
If the building business acquires the fencing material and then installs the fence at arm’s length rates for the SMSF, this could still
cause in-house asset issues as the fund has acquired an asset from the member; the fencing material. It all gets very messy and it might
just be easier to have someone else do it!
What happens if the building business either charges below market rates or does not charge the fund for labour cost? The rules have recently
been extended to capture non-arm’s length expenses where a related party is acting in a capacity other than as trustee and a non-arm’s
length expense was not charged. i.e., where the fund benefits from work performed by a member in a capacity other than trustee. The ATO sees
these non-arm’s length expenses as potentially artificially inflating an SMSFs earnings.
The market value of the work performed might be treated as a contribution, or all of the income from the asset could be deemed to be
non-arm’s length, which means the highest marginal tax rate will be charged on all income and capital gains derived from the asset.
This same scenario applies to any member of an SMSF (or relative of a member) who provides services to their SMSF – electricians, plumbers,
accountants, real estate agents, etc.
The rule is, work that is done for the SMSF by a related party in their professional capacity must be equivalent to arm’s length market
value, with no acquisition of materials. Free, below market value, above market value, may breach the superannuation rules. And, where work
is performed by a related party at market value, it must be documented and provable.
If you are not a qualified professional you cannot undertake work on behalf of your fund unless you are fulfilling your duties as trustee.