It said paragraphs 40-48 of the LCR state that section 295-550 do not apply to these internal arrangements while sections 17A and 17B of the Superannuation Industry (Supervision) Act 1993 (SIS Act) prohibits an SMSF from remunerating a trustee for internally provided services.

The submission said if a trustee provides services to an SMSF in a non-trustee capacity, the arrangement may be subject to section 295-550 unless the SMSF provides arm’s length remuneration for the services provided.

“Overall, we consider that the ATO has provided insufficient guidance to enable SMSFs to identify whether services provided to it by a trustee constitutes an internal fund arrangement or the provision of services in another capacity,” it read.

“This is of significant concern to our members, especially those in public practice, because an inadvertent misclassification can create significant exposure for SMSFs. Incorrectly classifying services provided by a trustee as internal arrangements may see Sec 295-550 apply as Sec 17A of the SIS Act prohibits such services being remunerated.”

The submission said the reverse also applies in that incorrectly classifying services as those provided in a non-trustee capacity may breach sections 17A and 17B of the SIS Act where arm’s length remuneration has been provided by the fund to the trustee.

“The ATO provided some guidance on this issue in LCR 2021/2, with limited updates being provided in LCR 2021/2DC. However, the guidance in LCR 2021/2DC still fails to address even the more commonplace scenarios that SMSF trustees encounter,” it read.

“Paragraph 47 of LCR 2021/2DC lists various factors that are to be considered in assessing the capacity in which services may be provided to an SMSF. However, as it is necessary to weigh up all the relevant circumstances and factors when making this assessment (paragraph 48), SMSFs will be reliant on practical ATO examples to guide them.”

The joint bodies said it would be valuable for the finalised LCR to provide guidance as well as examples of services that could be provided by trustees who work in a trade occupation – for example, builders, joiners, carpenters – and indicating if certain services are provided in their capacity as trustee.

“For example, a carpenter who installs or repairs timber windows on a rental property, a plumber who unblocks drains, a builder who provides labour to build a deck. Such people may be employees and may be registered but not individually licensed,” it read.

It also said if section 17B of the SIS Act can be applied, an SMSF can avoid the application of section 295-550 by ensuring a trustee receives arm’s length remuneration for services provided.

“The converse also applies. That is, if the exception in Sec 17B of the SIS Act is unavailable in a particular situation, then the trustee cannot be remunerated for the services provided (in their individual capacity), which would, therefore, create potential exposure to Sec 295-550,” it read.

“In these circumstances, the trustee would be unable to provide the services without exposing the SMSF to adverse consequences. SMSF trustees need confidence about how the ATO will administer this provision and whether any administrative relief will be provided.”