On 2 October last year, the government amended the non-arm’s length income rules which effectively broadened the application of these rules.
The amendments mean that even if the income a fund receives is on commercial arm’s-length terms, if the fund has not incurred an expense in relation to that income on commercial arm’s-length terms, the fund is still required to tax all the income as non-arm’s length income, explained SMSF Association deputy chief executive Peter Burgess.
The ATO also issued a draft ruling the same day the amendments were legislated which stated that the new requirement would not only extend to specific investments but also extends to general expenses.
“The ATO stated [however] that they would not be taking any compliance action in the 2018–19, 2019–20 and 2020–21 income years, where an expense that has not been incurred on arm’s-length terms is a general expense, so it doesn’t have any direct nexus to a particular investment in the fund,” Mr Burgess said.
Speaking at a recent Tax Institute conference, Mr Burgess said the industry is still waiting for the final ruling to be issued from the ATO on how they will be applying these new provisions, particularly in situations where the expenses are general expenses.
“The SMSF Association has put a submission forward that we believe it shouldn’t be applied to general expenses. We don’t think that’s going to get up. We understand that the Treasury supports the ATO’s view that these new NALI rules should apply to general expenses as well as specific expenses that apply to a particular investment,” he said.
“If that is the case, then we would like to see some form of safe harbour or de minimis threshold introduced to avoid situations where the fund doesn’t incur a small accounting fee, for example, and that results in all the income from the fund taxed as non-arm’s length income.”
“We don’t think that’s appropriate, so we’re looking to hopefully see some form of de minimis threshold in place so that, unless the expenses are over a certain amount, it shouldn’t provoke these new provisions.”
Mr Burgess said the SMSF industry is also still waiting to see how the new rules will be applied to staff discounts.
“In situations where an accounting firm may provide discounts to staff to have their SMSF administered by their firm, will that invoke these new provisions? We’re looking for clarification on that in the final draft ruling,” Mr Burgess said.
