Speaking in a recent webinar, DBA Lawyers senior associate Shaun Backhaus noted that in its ruling on non-arm’s length income (NALI) and non-arm’s length expenditure (NALE), LCR 2021/2, the ATO provides a safe harbour around staff discounts where the discount applies to all staff.
The ruling states that complying superannuation funds might enter into arrangements that result in them receiving discounted prices.
“Such arrangements will still be on arm’s length terms where they are consistent with normal commercial practices, such as an individual acting in their capacity as trustee (or a director of a corporate trustee) being entitled to a discount under a discount policy where the same discounts are provided to all employees, partners, shareholders or office holders,” the ruling stated.
Mr Backhaus noted that while the ruling is also an example of how this operates in example 8, it’s at a very basic and simplified level and is not particularly helpful for a range of real-life scenarios.
“They give the example of Sasha, the trustee of an SMSF of which she is the sole member. She’s an employee of an accounting firm and she engages the firm to provide accounting services and she receives a staff discount that all staff get,” he said.
“As it’s available to all staff at the firm and she’s not able to influence it, that’s on an arm’s length basis and there are no arm’s length expenditure issues.”
However, Mr Backhaus noted that in terms of accounting firms, it is more likely to be those at the director level in firms that will have SMSFs rather than employees.
“What would happen if Sasha was a director? Does it matter if she’s one of 10 directors? Would she have influence then?” he questioned.
Mr Backhaus said it’s not clear what level of influence would mean the director is actually controlling the decision around the discount.
“It does seem a bit unfair that if you’re in a small business and you’re a sole practitioner or you’re one of [two directors], that you can offer a discount to your employees but not your own SMSF because you control it,” he noted.
Ideally, Mr Backhaus said firms would want to have a recorded decision that everyone at that director or decision-making level came to, and that makes it clear that no one person controlled or decided it.
For many accounting firms, Mr Backhaus highlighted that a private binding ruling might be a good option in relation to staff discounts and non-arm’s length expenditure.
“If you’ve got an accounting firm with a number of SMSFs involved, it might be a good idea to get a private ruling because you could presumably rely on it for a number of years and have all the SMSFs put in the same ruling with the same set of facts and just with the names changed,” he said.
“Then the partners of the accounting firm [will know] what discount they can have and have the ATO sign off on it.”
One of the other things that are not discussed in the ruling, he said, is benchmarking the discount against arm’s length terms.
“I would be a little concerned if it was an overly great discount that other accounting firms don’t offer. [In that sort of situation], it might be a good idea to have some sort of evidence, although I don’t know how you’d go about benchmarking that as firms typically don’t make their internal discount rate public,” he noted.
Mr Backhaus noted that while the government has announced plans to make amendments to ensure the non-arm’s length expense (NALE) provisions operate as envisaged, the timing around this is still unclear at this stage.
The ATO has previously outlined it would not be extending the compliance relief provided in PCG 2020/5, which applies to non-arm’s length expenditure of a general nature past 30 June this year.
