Lyn Formica, head of education and content for Heffron, said in a technical update this means if a fund wasn’t charged a fee, or was charged a lower fee than it would have in an arm’s-length situation, and if that expenditure relates to a particular fund asset or specific expense for shortfall, it will be classified as NALE if there is a sufficient nexus between that shortfall and ordinary income from the asset and the capital gains made on its disposal.
“For example, when we’ve got a shortfall from an asset acquisition point of view, or a shortfall from an LRBA financing point of view, that is going to have a sufficient nexus such that the fund’s non-arm’s length income is going to be all of the ordinary income from the asset, any capital gain on disposal,” she said.
“This is simply how the law works. To get a different result is going to require some legislative change. There’s not much further we can do in this situation other than to make sure our clients don’t end up in it in the first place.”
Formica said the updated LCR also states that where someone other than the trustee is providing a service to the fund, then an arm’s-length fee must still be charged to the SMSF.
“Those rules have not changed. If someone other than the trustee is providing the service such as an accounting practice providing a service to your self-managed superannuation fund, or it’s your building company that’s providing the service, as distinct from the trustee providing the service, in that situation, the rules haven’t changed, and an arm’s-length fee must be charged to the fund,” she said.
“What’s an arm’s length fee? It’s a fee that’s determined using commercial pricing policy or what would have been charged to a third party for the same services.”
Formica said there has been some clarity provided in relation to discount policies.
“The paragraphs in relation to discount policies, paragraph 51 in particular, have been revised a few times. The draft that was released in January this year caused a lot of confusion, but thankfully, the revised wording does make things a bit clearer.”
“Essentially, we are not going to have NALE if the discounted price under this policy is consistent with normal commercial practice. The ATO gives an example that says [it is] something that would be consistent with normal commercial practice if the same discount is provided to all employees, partners, shareholders, office holders.”
She explained that this does not mean that a discount policy is automatically causing a NALE problem.
“It isn’t automatically non-commercial if the same discount isn’t provided to all the employees, partners, and shareholders. It is simply a factor that may indicate a policy is not consistent with normal commercial practice.”
“Similarly, if the trustee or the director can influence the policy, that also may be a factor which indicates it is not consistent with normal commercial practice. Now, unfortunately, influence is not defined, but I think the simplest message for us is that we just need evidence of the commerciality if we have a situation where the same discount is not being provided to everyone.”
The revised ruling has also addressed the situation where trustees are providing services to their own self-managed superannuation fund.
It is still necessary to distinguish between trustee capacity and individual capacity.
“If services were undertaken in the trustee’s trustee capacity, then we know section 17A of the SIS Act prohibits the trustee from charging a fee and the ATO says we don’t have a NALE problem. That was in the original ruling and it’s still there, which is great,” Formica said.
“What we have now is a new bit, and it basically says that if the services are not trustee duties, if there’s something that a person has undertaken with their individual hat on, and if SIS prohibits the trustee charging for those services under 17B, then we don’t have NALE.
“So, what would be a situation where the trustee would be prohibited from charging the fund for a fee? It’s all about the things that you’ve done in your individual capacity. So, they’re not trustee duties but you have to be appropriately licensed and qualified to provide the services, you have to be providing those services in the ordinary course of business, you have to be offering those services to the public and you have to meet all of that criteria to meet the 17B requirements.
“If you don’t, then you can’t charge the fund a fee and you don’t have NALE, so that’s a great change. Alternatively, if the services aren’t trustee duties, and you undertook them in your individual capacity, if SIS allows the trustee to charge a fee, if you meet the 17B requirements, then you’re going to have non-arm’s length expenditure if the fund isn’t charged a fee.”
You get this person to sign a supplier statement and give it to the SMSF. They are not running a business, so would be ineligible for an ABN. It won’t stop such a payment and it does mean no withholding required.
Doesn’t make the message any better – just another layer of BS legislation for clients to get trapped in and the ATO to potentially make the entire asset fully taxable at the top rate.
I didn’t realise there were so many comedians in Parliament either!
Take for example the SMSF trustee who mows the lawn at the rental property.
It’s NALE if he’ not paid, but per SIS 17B, if he’s not running a lawn mowing business, what makes you ”appropriately qualified” to operate a lawn mower?!
He can’t legally apply for an ABN if not carrying on a business.
If the fund does have to pay him to avoid NALE, but with no ABN, doesn’t the SMSF have to withhold and remit 47% tax? If it’s a rental property, is not domestic, so yes.
What a mess, no wonder clients get angry or think you are joking when you tell them this!