Daniel Butler, director of DBA Lawyers, said the non-arm’s length expense (NALE) legislation was approved by the Senate on 27 March 2024 and contains a range of measures, including the limit on general NALE for SMSFs.
“While there were no changes to the NALE provisions there were some minor changes to other provisions in this Bill. Parliament resumes on 14 May 2024 and the earliest date for the NALE changes to take effect will now be 1 July 2024 assuming the Bill is passed by that date,” he said.
Butler said the bill will, when it becomes law, reduce the tax impact where a lower or nil general expense is incurred by an SMSF by imposing an upper cap on the amount that is taxed as non-arm’s length income.
It also provides an upper cap on changes to NALE introduced in s 295-550(1)(b) and (c) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) where the NALE relates to a general expense.
This cap is two times multiple of the amount of the lower general expense for an SMSF or a small APRA fund.
Butler gave an example of how the new cap will be applied regarding an SMSF trustee who uses their brother’s accounting firm’s services, which would usually cost $8,000 under an arm’s length relationship but is not charged any fee.
“This is considered NALE as the parties were not dealing at arm’s length. Therefore, the tax payable would be calculated as 2 x $8,000 = $16,000 NALE and then $16,000 x 45 per cent which equals $7,200 tax payable by the fund,” he said.
“It should be noted that where the product of two times the NALE is greater than the fund’s actual taxable income, an ‘upper cap’ will be the SMSF’s taxable income for the financial year not including any assessable contributions or any deductions against those assessable contributions.”
However, if the trustee’s brother’s firm provided the accounting services valued at $8,000 for free, where the amount of NALI under two times $8,000 is $16,000 but the fund’s actual taxable income is only $6,000, the upper cap would result in total NALI being $6,000 for that financial year.
He added that once passed as law, the bill will apply from 1 July 2018 and lower general expenses before that date ignored for NALE purposes.
“While the amendments are an improvement on the current law where a general lower expenses is said to be connected to all ordinary and statutory income including concessional contributions, the SMSF Association and certain other professional bodies believe the 2019 NALE amendments should have been repealed for all funds and not just for the large APRA regulated funds,” Butler said.
He said there is no relief for SMSFs for specific expenses which will be subject to the usual NALI rules in s 295-550 and a specific expense will be any other expense other than a general expense.
“Typically a specific expense is one that relates to a particular asset or income stream,” he said.
“The proposed changes do not apply in relation to expenses relating to ‘gaining or producing income in relation to any particular asset or assets of the fund’ or a specific expense. This is unfortunate as specific expenses can result in tainting the asset for life.”
Butler said advisers should be on top of the NALI/E legislation and how it impacts their clients and more importantly, those advisers offering staff discounts, should have an SMSF staff discount policy in place.
