Peter Burgess, chief executive of the SMSF Association, said on a recent webinar discussing the changes that there were a “couple of things” the association picked up in the latest ruling for which it would have liked to see more detail.
“There is not a lot of detail around valuations. I think we all know that when it comes to properties, there’s a well-established market for that, but it’s not the same when you’re valuing services, and whether there’s a range that would be acceptable for those types of things,” Burgess said.
“We did make a submission where we put forward that concept of ranges for services, so we were a little disappointed not to see further information in the ruling about that. We thought it deserved more than just a few footnotes.”
Burgess said it is quite a significant issue and relatively common to see services being provided in the SMSF sector by trustees and related entities.
The other issue that the SMSFA had dealt with non-arm’s length expenditure for specific assets of the fund, which Burgess said is “still a real problem for these provisions”.
“We think it’s punitive that you might pay a small price for quite a minor improvement to the asset, and as a result, the capital gain is forever tainted,” he said.
“That’s unfair, and we’re continuing to push for what would need to be a legislative change that’s been rectified. Unfortunately, we’re not getting very far with Treasury, and I don’t think we will until such time that we actually see a real case that goes before the courts, and the punitive nature of those provisions are challenged. Then we might see some success with the Treasury.”
Mark Ellem, head of education for Accurium, said the NALI rules have been the subject of much discussion in the SMSF sector ever since they were expanded to include non-arm’s length expenditure in 2019.
“Last year, following a sustained period of advocacy work by the SMSF Association and others, there were further amendments made to these rules, and as a result of those amendments, the severity of the 2019 amendments has been reduced, or some of the rules have been reduced for self-managed super funds,” he said.
“However, having said that, there is still quite a bit of confusion around the way these rules are applied to SMSFs, and quite a bit of uncertainty.”
The ATO released an update in September this year to LCR2021/2 to clarify the way these rules would work for SMSFs; however, Ellem said, following a thorough read-through of the update, it is clear “the advocacy work is not over”.
“There is still more work to do, and as we work through the details, it’s becoming clearer that will have to continue to push for practical compliance settings and proportionate outcomes for inadvertent and minor errors that are made, in particular in situations where the non-arm’s length expenditure may relate to a specific asset of the fund.”
He said June 2024 amendments also introduced the overall capping of the amount of non-arm’s length income a fund can have, or the amount of the fund’s taxable income, but not including any assessable contributions.
“It removes the possibility, or the potential for assessable contributions to be taxed at the top marginal rate. One other thing to note about non-arm’s length expenditure, which is general in nature and being highlighted in the revised ruling, is that for non-arm’s length expenditure to give rise to non-arm’s length income, there must be a nexus, a connection between that expenditure and the relevant income.”
“If there’s not, then you can’t have non-arm’s length expenditure.”
