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I have audited a fund that owns a commercial building with over 10 units (so numerous unrelated tenants). As the trustee/member would like to save money for the fund, he does minor repairs himself. He will go to Bunnings and buy the materials. This may involve a number of transactions over a few months. Later the fund will reimburse him for the total cost of the materials (no labour). He is not a licenced builder or tradesperson. I have deemed this to be a breach of the borrowing provisions in S.67. The trustee has asked for advice as to how he can do this correctly. He refuses to pay a traders person $200 for something that he can fix with $15 of materials. Bunnings will not accept a cheque and the bank will not issue the fund with a credit card or a debit card (note I have advised that credit card would not be acceptable). Any suggestions?
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Thankyou, that helps
Hi Nicole
Normally a trustee paying for small expenses on behalf of an SMSF would not be considered a borrowing, however your query refers to "transactions over a few months" and given there is a delay in reimbursing the expenses it could be argued that there is a contravention of Section 67 of SIS, which prohibits an SMSF from entering into borrowing arrangements except in limited circumstances.
We find some relief in SMSFR 2009/2 "SMSF's: the meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993" which refers to what is a borrowing by a SMSF and what does not constitute a borrowing. SMSFR 2009/2 advises that expenses paid on behalf of an SMSF by another party (including the trustee) are not borrowings if they are repaid "immediately".
A helpful example is given at paragraphs 70 & 71:
"Example 7: reimbursement of payments made on behalf of SMSF
70. Gary and Sonia are trustees and members of an SMSF. The SMSF is due to make a payment to an entity for services rendered to the SMSF. Gary pays the amount on behalf of the SMSF. Gary immediately seeks and is given a reimbursement from the SMSF of the amount paid on behalf of the fund.
71. The arrangement does not give rise to a borrowing as there was no temporary transfer of money from Gary to the SMSF. The amount was paid on the SMSF's behalf and was then immediately reimbursed to Gary. Accordingly, the SMSF trustees have not contravened paragraph 67(1)(a)."
The expenses should be reimbursed immediately rather than "after a few months" and then the SMSF should not breach the prohibitions on borrowing in Section 67 of SIS.
The other issue that the Trustee should keep in mind are the NALI / NALE rules. The Trustee would need to ensure that the work they are doing on the property are "minor and incidental" and are undertaken in their role as trustee.
The NALI / NALE rules are explained at LCR 2021/2 - "Non-arm's length income - expenditure incurred under a non-arm's length arrangement".
Thanks
SMSF AAA