Critical NALE issues need to be addressed by ATO, says SMSF Association
The SMSF Association has called on the ATO to address several critical issues in its final ruling on how the new rules for non-arm’s length expenses (NALE) will apply.
The ATO issued a draft Law Companion Ruling in 2019 about NALE that it intended to release last year but was delayed because of COVID-19.
Speaking at the SMSF National Conference 2021, the SMSF Association’s deputy CEO and director of policy and education, Peter Burgess, said that this ruling was one of the most anticipated events on the SMSF calendar this year.
“These new rules will apply in situations where the parties do not deal with each other at arm’s length and the trustees incur an expense that is not on arm’s-length terms,” he said.
“In such a complex situation, the association believes it’s imperative that several questions and points of clarification are addressed in the final ruling.”
Mr Burgess said there needed to be more examples to illustrate the difference between a service provided by an SMSF trustee in their capacity as a trustee and services provided in their capacity as an individual.
“In particular, if an SMSF member is qualified and licensed to provide a particular service to the public, will the new NALE rules automatically apply if they provide that service to their fund and don’t charge their fund an arm’s-length fee?
“Or will it depend on the use of business assets and, if so, will there be a materiality test so that incidental use of business assets won’t invoke the new rules?”
If an SMSF acquires an asset and doesn’t incur arm’s-length expenditure, Mr Burgess said it wasn’t clear if that meant the asset is forever tainted and any capital gains realised when the asset is sold will be taxed as non-arm’s length income even though the fund may have incurred arm’s-length expenditure in relation to the asset in all subsequent years.
“How will the rules apply to reoccurring expenditure that doesn’t relate to the acquisition of an asset if the fund incurs non-arm’s length expenditure in one year but not in subsequent years?” Mr Burgess asked.
Mr Burgess also questioned how the new rules apply to issues such as staff discounts and if the new rules apply in situations where the discount is standard company practice and applies to all staff.
“This would also lead to defining what evidence auditors will need to obtain to be satisfied that an expense, which has been charged to the fund by a member or a related party for a service provided, is on commercial terms,” he said.
Mr Burgess reminded the National Conference’s delegates of the need to ensure SMSFs were incurring fees on commercial arm’s-length terms now for services provided to their fund by a related party, or by a trustee (who is authorised and licensed to provide that service), and there was a direct link to a particular fund asset.
“The ‘no-compliance’ action approach previously announced by the ATO only applies where the NALE relates to a general fund expense and this transitional period is due to expire on 30 June 2021,” he said.
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.