In June this year, the ATO released PCG 2020/5, which set out the ATO’s transitional compliance approach in relation to non-arm’s length expenditure of a general nature.
The ATO outlined in PCG 2020/5 that it would not allocate compliance resources to determine whether the income of a complying super fund is non-arm’s length income (NALI) where the fund incurred non-arm’s length expenditure of a general nature that has a sufficient nexus to all ordinary and or statutory income derived by the fund.
The ATO’s transitional compliance approach covers the 2018–19, 2019–20 and 2020–21 income years.
PCG 2020/5 followed the release of draft LCR 2019/D3 last year which clarified how the amendments to section 295-550 of the Income Tax Assessment Act 1997 operate in a scheme where the parties do not deal with each other at arm’s length and the trustee of a complying super entity incurs non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income.
In an online update, the ATO explained that, ordinarily, SMSF auditors would be required to apply the preliminary view in draft LCR 2019/D3 and modify Part A of the Independent Auditor’s Report (IAR) if they consider the fund’s tax calculation may be materially misstated because the fund incurred non-arm’s length expenditure of a general nature with a sufficient nexus to all income derived by the fund, making the income NALI.
“We recognise that the view in draft LCR 2019/D3 and the compliance approach in PCG 2020/5 may be creating some uncertainty for auditors in relation to their audit and reporting obligations,” the ATO stated.
“As such, the ATO advises that SMSF auditors do not need to modify their opinion in Part A of the IAR for the 2018–19, 2019–20 and 2020–21 income years in respect of non-arm’s length expenditure incurred by a fund of a general nature that has a sufficient nexus to all ordinary and or statutory income derived by the fund, for which the ATO’s transitional compliance approach in PCG 2020/5 applies.”
The ATO said SMSF auditors will still need to consider modifying their opinion in Part A of the IAR where the fund incurred non-arm’s length expenditure that directly related to the fund deriving particular ordinary or statutory income as the compliance approach in PCG 2020/5 does not apply.
“We are currently finalising the content of draft LCR 2019/D3, which has been delayed due to the impacts of COVID-19. The final ruling will provide further clarity around our position on the application of the NALI provisions to non-arm’s length expenditure of a general nature,” the ATO said.
“We will provide further guidance on any flow-on effects for auditors once the ruling is finalised.”
