SMSFs warned on outdated ATO rulings on NALI
SMSF clients that are relying on ATO rulings on non-arm’s length income issues from a few years ago have been warned these rulings may no longer be current following the amendments in the law, says an industry lawyer.
Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said the amendments to non-arm’s length income (NALI), which expanded the definition of NALI, have now been in place since 1 July 2018.
The rules were expanded to also include income derived by an SMSF from a scheme in which the parties weren’t dealing with each other at arm’s length and where the fund incurred expenses in deriving the income that was less than those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s-length basis.
Limited recourse borrowing arrangements (LRBAs), in particular, can often be impacted by the NALI rules, Mr Hay-Bartlem said at the SMSF Adviser Technical Strategy Masterclass.
“A classic example is where you’ve got a related-party loan and you’ve got no interest or less than market interest. Clearly, that’s going to give you a NALI issue, because the interest expense is there and we’re putting more income into the super fund and giving less to the related-party lender,” Mr Hay-Bartlem explained.
“Now when people first began doing these, a lot of people went and got ATO rulings. So the ATO said that they didn’t have a NALI problem.”
SMSF trustees who are still relying on these rulings may now have some issues, he warned.
“You need to check that those rulings are still current because the ATO only gives you a ruling for a limited period of time,” he cautioned.
“The other thing is that the law has changes, so the NALI rules weren’t in yet. So, even if you do have a longer-term NALI ruling, does it carve itself out or stop working if the law changes?”
Mr Hay-Bartlem said it’s very important that SMSF professionals and trustees think about this and check whether these rulings still apply.
“A lot of people just think I’ve got the ruling, I’m OK— but it’s not quite that simple,” he said.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
