The ATO this week released draft law companion ruling LCR 2018/D10, which sets out the ATO’s views on how the proposed amendments to section 295-550 of the Income Tax Assessment Act 1997[2] operate in a scheme where a superannuation entity incurs non-arm’s length expenditure in gaining or producing ordinary or statutory income. You can access it here.
The proposed amendments to the NALI provisions are currently before the Senate.
SuperConcepts general manager of technical services and education Peter Burgess said that the LCR “sheds some welcome light on the way the ATO will administer the proposed NALI changes”.
Mr Burgess said that in terms of the services a trustee provides their own fund, it appears the impact won’t be as significant as first thought.
“My reading of the draft ruling together with section 17B of the SIS Act suggests the proposed new NALI rules are only likely to apply in very limited circumstances,” Mr Burgess said.
“Those circumstances appear to be where the service relates to a particular fund investment, is not a service they are performing in their capacity of trustee and they are licensed to provide the service but they charge their fund a lower fee than they would charge the general public.”
However, if the service relates to a particular fund investment and is being provided by a related entity on non-arm’s length terms, then the new NALI provisions would apply, he explained.
When the bill and explanatory memorandum were first released, Mr Burgess said that there was concern these NALI changes may have a much broader application and would capture virtually all services that a trustee provides their own fund on a non-arm’s length basis, aside from a small number of services a trustee performs in their capacity of trustee of the fund.
“However, what the draft ruling appears to be saying is that if the trustee provides a service to their fund and they are not able to charge their fund because they are not licensed to provide that service, the non-charging of that fee won’t invoke the new NALI rules,” the general manager said.
Presumably this is because the trustee is considered to have performed that service in their capacity as a trustee.
This approach appears to address the previously reported NALI dilemma, he explained, that is the new NALI rules could apply if no fee is charged even though the trustee is prevented from charging a fee under section 17B because they are not licensed to provide that service.
“In this regard, I think the industry would welcome the approach outlined in the draft ruling,” he said.
What is still not clear, he said, is what constitutes a service a trustee performs in their capacity of trustee of the fund.
“For example, if a financial adviser provides investment advice to their own fund and doesn’t charge their fund for that advice, will that invoke the new NALI rules?” he said.
“In my view, that type of service would or should constitute a service a trustee performs in their capacity of a trustee and, therefore, shouldn’t invoke the new NALI rules. But it’s difficult to reach that conclusion reading the draft ruling and the Explanatory Memorandum.”
Surely there would also be an issue with “early access to super” if an adviser or accountant charged there own super fund for services they provided
What I see as a concern with these NALI rules is the application of NALI/NALE to accountants doing their own accounts. The ruling does explicit say this is not an issue however, the example is rather basic and doesn’t explain how the accountant operates i.e. sole trader, via a separate legal structure but still sole principal or with other principals, or how the accounts are prepared (firm software or manually via the accountant/trustee’s own, paid for software).
Can we just assume that because no sane accountant would use a ledger book and excel to do their SMSF accounts when their [b]business [/b]has dedicated software, that this is a non-issue, sanity prevails and we continue on as before? Would the circumstances be different if staff in trustee’s accounting firm does the work for no fee?
I have said this on so many occasions that the NALI provisions are nasty. The Commissioner’s guidelines emphasise that and must be read by all SMSF practitioners. Quite apart from the confusion and complexity Peter notes re financial planning advice, if the Commissioner can show that a Trustee of a SMSF, retail or industry fund acquired an asset such as a share or property at even a small discount, ALL income is NALI as is any capital gain. This is the real problem when investing and past transactions need to be looked at in detail.