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ATO pushed for clarity on unit trusts in final NALI ruling
With the ATO expected to release its final non-arm’s length income ruling soon, one law firm hopes the ATO will provide clarification on the potential NALI implications of an SMSF trustee assisting with managing the activities of a unit trust.
DBA Lawyers director Daniel Butler said that the Draft Law Companion Ruling LCR 2019/D3, which covers the Commissioner’s preliminary view on the amendments in Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, does not provide any examples where the SMSF trustee assists with managing the activities of a unit trust that owns real estate or other investments.
“[For example], the unit trust may not have a real estate agent and perhaps the SMSF trustees are collecting the rent and doing the books,” Mr Butler explained.
The closest example, he said, is example 8 where an SMSF acquires units in a unit trust under a lower interest rate LRBA.
“Provided the units were acquired at market value, the Tax Institute submitted that this should not be NALI. It should not be NALI because there is no sufficient and necessary nexus to the low interest in the appreciation of the underlying investments in that unit trust which increase the value of the units via net tangible assets reflected in the value of those units,” Mr Butler explained at the CA ANZ National SMSF Conference.
Where SMSF trustees or directors provide services to the unit trust, Mr Butler questioned whether this will be treated in a similar manner to SMSF services.
“Are they a trustee activity or are they an individual activity? For example, where the SMSF invests in a unit trust and the members assist in managing the real estate, should the trustee remunerate the members?” he questioned.
“Should they pay the members for their activities? And if they do, what amount do they pay them? How do you make an arm’s length payment with them? Do you go for what a real estate agent would charge or do you pay what a trades person would charge?”
These types of questions, he said, become quite difficult in a practical sense to apply to a unit trust.
“Would you be better off having a service agreement so that there’s already an entity that engages labour so that the unit trust does not have to go through engaging labour and paying ‘pay as you go’ and making super contributions etc to engage labor to pay for those services?” he added.
“Or should the unit trust simply outsource those activities to a real estate agent and be done with it? That is, the members no longer provide those activities because they outsource them to a real estate agent in order to minimise the risk of NALI.”
“Those are issues we are hoping that the ATO will be able to confirm or clarify in their final position.”
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
The unit trust issue arguably goes away if you have a different trustee company as trustee of the unit trust, as the Directors of that Trustee - (who are most likely the members of the SMSF, and the Directors of the SMSF trustee or are the trustees themselves) - are supposedly acting as the Directors of the Trustee of the unit trust and therefore are acting in their capacity as directors of the Trustee and managers of the unit trust assets. Arguably with a different set of responsibilities and liabilities, and therefore arguably having no relationship with the SMSF or the SMSF members. So the question should not arise. YEs they may be related, but if we go down that path then everything will be related if you have a SMSF and that is not what NAli was supposedly about initially.
On a side note it is interesting that the ATO keep adding sections to the tax Act to cover specific circumstances because they have become to lazy to use the provisions that are already in the Tax Act to over these non arm length transactions.
One of the classic cop outs by the ATO spawned a whole new tax - it was FBT.0- Be mindful an SMSF or unit trust can't pay service fees to a Trustee in which they are not qualified. For example if I work as an accountant and earn $200 an hour, I can't paint my SMSF investment property and charge $200 an hour for these services.0
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