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SMSF has two trustee members and the Fund has invested in a piece of land. A builder company is building on the land for the SMSF to generate rental income. The builder company's sole director is one of the trustee members of the Fund. The builder company has issued invoice to the SMSF for payment. Is the arrangement considered a breach of S 67 and S 17 A of SISA ?
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Hi Kylie
Section 67 is the borrowing rules so a related party issuing an invoice to a SMSF & doing work on the property would not normally be a breach of this section. It has been raised previously that if a Fund reimburses a related party for payments it has made then this could be seen to be a borrowing.
The best approach would be for the SMSF to acquire and pay directly for any building supplies from third-party suppliers rather than reimbursing the related party builder. This would reduce the risk of breaching the borrowing rules (section 67) or the acquisition of asset rules from a related party (section 66).
Section 17A is the rule re the definition of an SMSF (re who a trustee has to be or can be). It does require that trustees cannot be remunerated however section 17B of SIS states that the remuneration of trustee rules do not apply if:
"(a) the trustee performs the duties or services other than in the capacity of trustee; and
(b) the trustee is appropriately qualified, and holds all necessary licences, to perform the duties or services; and
(c) the trustee performs the duties or services in the ordinary course of a business, carried on by the trustee, of performing similar duties or services for the public; and
(d) the remuneration is no more favourable to the trustee than that which it is reasonable to expect would apply if the trustee were dealing with the relevant other party at arm's length in the same circumstances."
That is if the rules above are followed there will not be a breach of Section 17A if a related party is paid for building services.
The sections / regulations that you would also need to consider re a related party doing building work for a SMSF are (re the audit report are):
1) Section 62 - sole purpose test.
2) Section 65 - financial assistance to a member
3) Section 66 - acquisition of assets from a related party
4) Section 109 - arm's length rules
Other requirements to consider are the NALI / NALE rules.
I note the remuneration of trustees & the NALI / NALE rules are complicated so preferably the SMSF receives professional advice that what they are proposing will not breach the SIS requirements.
Thanks
SMSF AAA