David Busoli, principal of SMSF Alliance, said where the documentation for an SMSF confirms that the parties have made a “reasonable” attempt to determine the expenditure, the ATO won’t try and determine whether those expenses are, in fact, arm’s length expenses.
“There has been significant comment on the government’s proposed treatment of general non-arm’s expenditure in SMSFs but what is a general expense,” Mr Busoli said.
General expenses, he continued, include actuarial costs: accountancy fees, audit fees, costs in connection with the calculation and payment of benefits (not the benefit itself), investment adviser fees, and other administrative costs incurred in managing the fund.
“The expenditure may be of a revenue or capital nature or deductible under a specific provision so can include fund establishment and deed amendment costs,” Mr Busoli said.
While any material instance must be identified by the SMSF’s auditor, problems arise when unreasonable amounts are cited in any auditing process.
“This poses a conundrum as only those obvious instances, such as preparing the fund accounts for $0, will be necessarily caught given that it is not the auditor’s responsibility to determine the market value of a service,” he said.
“The ATO have a similar problem which is probably why their compliance resources will only be directed ‘towards ascertaining whether the parties have made a reasonable attempt to determine an arm’s length expenditure amount for services provided to the fund’.
“Clearly, silly numbers like the $0 example above, will fail but, if the amount is ‘reasonable’ and documents show that both parties have made a reasonable attempt to determine that the item is at arm’s length, then the auditors will have no reason to raise the issue.”
Shelley Banton, head of education for ASF Audits, said materiality has no effect on SMSF compliance.
“However, it is mission-critical when an SMSF auditor considers whether the financial statements are materially misstated,” she said.
“Because general expense NALI is not a compliance issue, it is about whether the fund’s tax calculation is correct.
She said given that non-arm’s length transactions primarily involve related parties, the ATO’s compliance approach outlined in LCR 2021/2 is particularly relevant.
“Where the SMSF has documentation confirming that the parties have made a ‘reasonable’ attempt to determine the expenditure, the ATO will not allocate compliance resources to determine whether those expenses are, in fact, arm’s length expenses.
“And it follows that SMSF auditors should not be required to go down this path either.
“At the very least, documenting that both parties have made a reasonable attempt to determine that the expense is at arm’s length will be of paramount importance.”
