Can I pay for SMSF expenses personally?
All SMSF expenses should be paid directly from the fund’s bank account.
However, under certain circumstances a member can pay for fund expenses provided it is reimbursed on a timely basis or possibly taken up as a member contribution depending on the members contribution caps.
Any SMSF expense must be invoiced in the name of the fund.
Reimbursement not made soon after the expense was incurred
If the reimbursement is not made quickly the ATO may take the view the SMSF borrowed money to pay the expense which breaches the borrowing prohibition.
Payment made in error
Another scenario that may occur is the payment of the accounting fees on behalf of the SMSF are paid from the wrong bank account in error. The ATO acknowledges that a genuine mistake can be rectified as soon as it is discovered by the trustee. Evidence showing it was a mistake and not due to a cashflow shortage or some other issue at the time is critical. The longer time ticks by and the error remains unresolved weakens the argument supporting that an error was made.
Payment of SMSF expenses allocated as a Contribution
SMSF expenses such as accounting and audit fees paid by a member and not reimbursed by the SMSF may be allocated as member contributions based on a historical ruling by the ATO.
However, the ATO are updating the ruling and draft ruling TR 2010/1DC2 is consolidating the ATOs views on the interaction between the non-arm’s length income (NALI) provisions and superannuation contribution rules. SMSF expenses not paid by a SMSF may be caught under the NALI rules as the fund has paid nothing for the expense which may be considered a non-arm’s length expense which can trigger the NALI penalty tax rate of 45%. Based on the draft ruling the ATO is unlikely to consider the SMSF expenses paid by a member under NALI but will treat the expense as a member contribution which it is has done historically.
Some tricky expenses
It is not unusual for the following expenses to be paid by a member of their SMSF. The expenses can often be incurred in conjunction with personal advice. It is crucial to ensure the separation between SMSF expenses and a personal expense. Any SMSF expense paid personally should be either reimbursed immediately or seek advice if it can be allocated as a member contribution after taking into account the member’s contribution cap.
- Pension establishment
As part of establishing an account-based pension on behalf of a member the expenses incurred are SMSF expenses. However, it is not unusual for personal financial advice to be wrapped up as part of the pension establishment and the total fees paid by the member. The invoice would need to be split to ensure the fees are allocated to the relevant entity.
- Annual ASIC fee paid in relation to a corporate trustee
The annual ASIC fee required for a corporate trustee is generally minor and it is clear when the corporate trustee is a sole purpose trustee that the fee is a SMSF expense which should be paid by the fund. However, where the corporate trustee is not a sole purpose trustee/special purpose company it is more difficult to determine who should pay the expense. A company can be a trustee of a SMSF and also trade in its own right, or be a trustee of a family discretionary or unit trust although it is highly unadvisable.
Should the fee be apportioned or if the fee is paid wholly by the non SMSF entity is this a NALI issue? The ATO have not clarified their position on this matter. It may be appropriate to apportion the ASIC fee to ensure the SMSF pays the relevant portion of the ASIC fee and related administration charges.
- Advice obtained in relation to a Binding Death Benefit Nomination (BDBN)
Similar to the payment of fees to establish a pension, personal estate planning for the member can easily be mixed into the overall fees incurred when obtaining advice about BDBNs. Care is required to split the fees between estate planning and advice relating to the BDBN.
The establishment fees are commonly paid by one of the members prior to the SMSF being established. The superannuation regulation 5.02 specifically allow the establishment costs to be charged against a member’s benefits. Therefore, the establishment costs such as the fund’s trust deed, corporate trustee and the initial investment strategy are allowed to be reimbursed by the SMSF.