The ATO had recently extended its transitional compliance approach set out in Practical Compliance Guideline PCG 2020/5 – Applying the non-arm’s length income provisions to “non-arm’s length expenditure”.
The PCG now applies to the 2018–19 to 2021–22 income years.
The extension has been provided while the ATO will finalise Draft Law Companion Ruling LCR 2019/D3 Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement.
As outlined in PCG 2020/5, the ATO will 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.
For auditors, the ATO said this means if an SMSF incurs non-arm’s length expenditure of a general nature prior to 1 July 2022, it will not retrospectively raise an assessment and treat all of the fund’s income as non-arm’s length income for any income years up to the end of 30 June 2022.
“Since the transitional compliance approach with respect to non-arm’s length expenditure of a general nature will end on 30 June 2022, auditors will need to consider the impact of the NALI provisions on general fund expenditure from 1 July 2022 when conducting the annual financial audit on the fund,” the ATO said.
“They do not need to be concerned about any potential NALI risk relating to general fund expenditure prior to 1 July 2022.
“However, auditors will still need to consider whether the fund incurred non-arm’s length expenditure that directly related to the fund deriving particular ordinary or statutory income from 1 July 2018 as the transitional compliance approach in PCG 2020/5 does not apply.”
The ATO had also recently advised auditors on the extension changes which will affect Part A of the IAR requirements.
“As a result of the extension, you do not need to modify your opinion in Part A of the IAR for the income years where the ATO’s transitional compliance approach in PCG 2020/5 applies,” the ATO reminded.
“However, you will still need to consider modifying your 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.”
