Trustees of self-managed superannuation funds (SMSFs) face strict tax and super laws when undertaking repairs and renovations on real estate held within the SMSF.
Many trustees wonder what they can legally do to enhance the value of their fund’s property without falling foul of these strict rules.
Trustees must ensure that any services provided to a SMSF are undertaken on an arm’s length basis. Failure to do so may result in some of the fund’s income being taxed at 45% under the Non-Arms Length Expenditure (NALE) rules rather than the general superannuation tax rate of 15% or nil if the fund is in pension phase.
Broadly, these rules can apply where the cost of expenses connected with a fund’s property investments, such as property management expenses, repairs and maintenance, etc are less than might be expected in an arm’s length situation.
This does not mean however that a trustee who provides any service to an SMSF must charge a fee – see more information below.
Further, the SMSF needs to be invoiced directly for any goods and materials as otherwise the fund will be deemed to have acquired them from the members directly which is prohibited.
Key Considerations
- Who provides the service? Consider activities undertaken by a person in their individual capacity vs in their trustee capacity
- Who is invoiced for the goods or service? Acquiring building materials and any other goods or services connected with the property from related parties, even if at market value, will breach the super laws.
Trustee v Individual capacity
A fundamental rule for SMSFs is that a trustee cannot be remunerated for their duties as trustee. This is embedded in superannuation law. Examples of trustee duties include opening a bank account, making investments, collecting rent and paying expenses, and repairing and maintaining assets. However if a service is provided in their individual professional capacity then a fee must be charged.
Examples
Peter is the trustee of his SMSF and he is also a licensed electrician by trade. The SMSF owns a residential property in which Peter undertakes electrical repairs that can only be done by a licensed electrician. | Peter is considered to be acting in his individual capacity because the activities have been performed pursuant to a licence/qualification. The fund must be charged an arm’s length fee for the work. |
Michael’s SMSF owns a commercial property and does not engage the services of a property management business. Michael attends to all administrative duties in connection with the lease (eg collecting rent, renegotiating lease terms upon expiry, organising repairs). Michael also mows the lawn, tends to the garden at the property and makes minor repairs using his personal mower and tools. He does not provide these services to others. | These activities are obligations imposed on Michael because he is a trustee of an SMSF (ie they are trustee duties). Michael cannot charge the SMSF fees for these services as he performs them in his capacity as trustee. |
Andrew is a licensed builder and performs minor repairs on a jammed door in his SMSF’s investment property using his tools of trade. On another occasion, Andrew builds a deck at the property, largely using timber and materials left over from another job. | Ad-hoc maintenance activities are obligations imposed on Andrew because he is a trustee of his SMSF (ie they are trustee duties). The use of his tools of trade for such activities are minor and infrequent. Building the deck however gives rise to Andrew’s specialist skills as a builder, with such services being offered to the public. As Andrew is acting in his individual capacity he must charge an arm’s length fee to the fund for the work performed. |
Further to the example of Andrew above, as the materials for the deck are sourced from Andrew, the SMSF has unknowingly breached the super laws. To avoid such compliance issues, the SMSF trustee must source all materials directly from the supplier and ensure the SMSF is invoiced, not the trustee in their individual capacity.
Consulting a professional before undertaking any repairs or renovations is crucial to ensuring compliance with the law.