Small general expense oversights can trigger NALE, warns professional

Under the revised penalties in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 introduced to Parliament last month, a breach of NALE rules that related to an SMSF general expense was classified as non-arm’s length income. The income was calculated as twice the amount of the discount received by the fund and then taxed at 45 per cent.

Mr Busoli said in a recent example that he was shown the accounts of an SMSF that had been administered by the same accountant for many years.

“No administration fees had been charged to the fund at all. Instead, I presume, the fees that would have been charged were loaded onto the fees payable by an associated tax entity that was paying a higher tax rate,” he said.

He added that if the fund was flagged by the ATO there were a number of possible outcomes that could eventuate – some severe.

“If the accountant had issued an invoice for the fund that was paid by the other entity, then this would constitute a deemed concessional contribution to whomever the trustee decided,” he added.

“If no invoice had ever been issued regarding the fund, the tax deduction taken by the other entity for the fees attributable to the fund would be disallowed – plus penalties of course.”

He continued that deemed concessional contributions could still be invoked, but there could be a much more detrimental outcome.

“Most worrying, is the possibility that the ATO might apply NALE to the whole fund, given that this is a general expense,” he said.

“Certainly, there would not be an issue if the accountant had charged a ‘reasonable’ fee, with considerable leeway as to what constitutes "reasonable", but to charge no fee at all is just being foolish.”

Mr Busoli said in this instance, NALI/E confusion could have been avoided if the accountant had clearly stated what the fee was each year.