SMSFs reminded on limitations of PCG 2020/5
While the extended compliance relief for non-arm’s length expenses has been welcomed, there are still many circumstances where SMSFs can incur NALI, says Heffron.
Last week, the ATO announced it would extend its transitional compliance approach outlined in PCG 2020/5 for an additional year. Originally, this was due to expire at the end of this month.
Heffron head of SMSF technical and education services Lyn Formica said that whilst this is a welcome move by the ATO, this does not mean SMSFs have a free pass on non-arm’s length expenditure (NALE) issues until 30 June 2023.
“PCG 2020/5 is very limited in its application, but it does mean that if an SMSF incurs expenditure of a general nature that has sufficient nexus to all of the income of the fund, the ATO will not devote compliance resources to determine whether the fund has NALI,” she explained.
This includes expenses such as bookkeeping fees, bank reconciliations, bank payments, liaisons with SMSF administrators, preparation of the fund’s financial statements and annual returns, and use of accounting software.
However, Ms Formica warned that there is still a range of situations where SMSFs will still be at risk of NALI and all or part of the income of the fund is taxed at 45 per cent.
This may occur, for example, where a trustee provides services to their own SMSF, the services relate to particular fund assets and they are performed in a non-trustee capacity, she noted.
NALI may also apply where someone other than the trustee provides services to the SMSF that relate to particular assets and the amount charged is less than what would be expected to be charged between parties dealing at arm’s length.
She noted that discounted rates for staff and relatives are permitted, provided they are consistent with the provider’s documented discount policy and normal commercial practice.
SMSFs may also be at risk of NALI where the fund invests in other entities such as companies or trusts, services are provided to the company/trust and the amount charged by the service provider is less than what would be expected in an arm’s length situation.
NALI can also arise where SMSFs invest in other entities, and finance is provided to the company/trust on terms more favourable than what would be expected in an arm’s length situation.
SMSFs may also be hit with NALI if the SMSF acquires an asset for less than market value through a non-arm’s length dealing.
Ms Formica noted that the industry is still awaiting clarity on situations where funds have purchased assets from related parties partly for cash and partly in-specie.
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.
