The amendments are part of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.
The regulator stated that it has reviewed its guidance materials and is seeking feedback on the proposed changes. Both documents are now available for public consultation until 24 January 2025.
The proposed draft changes to LCR 2021/2DC explain the 2024 legislative amendments to the non-arm’s length income (NALI) provisions and remove the ATO’s compliance approach regarding non-arm’s length general fund expenses given the updated law.
The Tax Office said SMSFs need to know that where a fund trustee fails to deal at arm’s length regarding a particular asset and fails to pay an arm’s length price for anything related to that asset, all income for that asset (which may include any capital gain on its disposal) will be NALI. This income will be subject to the highest marginal rates of tax.
Additionally, it said there is an easy way for fund trustees to avoid the tax consequences of the non-arm’s length expenditure rules: to deal at arm’s length and pay an arm’s length price for assets, products, and services.
“When a person provides services to a fund in their capacity as trustee of the fund, the NALI provisions do not apply, even if no amount is charged to the fund.”
“However, if the person provides services in some other capacity (such as through their own business), they must ensure the dealings are at arm’s length and an arm’s length price is paid by the fund. This also applies where a third party is engaged to provide services for the fund.”
The LCR clarified that the arm’s length price paid by a trustee could be a discounted price and still be on arm’s length terms where it is consistent with normal commercial practices – e.g. when a trustee is entitled to a discount under a discount policy where the same discount is provided to other individuals such as employees or shareholders.
Fund trustees should keep records of all dealings to demonstrate the arm’s length nature of the dealing, including the price paid.
Additionally, draft TR 2010/1DC2 was amended in light of the changes to NALI. The ATO said it has also removed its proposed compliance approach for contributions arising from value-shifting arrangements.
The compliance approach in Appendix 2 of the draft ruling has been removed as it didn’t apply in many circumstances. In the limited circumstances when it did apply (where there was value shifting), it provided an unfair advantage by allowing these trustees dealing on a non-arm’s length basis to bypass the contribution cap rules.
For more detailed guidance, refer to LCR 2021/2DC and TR 2010/1DC2 on the ATO website.
