Aaron Dunn, CEO of Smarter SMSF, said in the latest SMSF Adviser podcast that the government has now finalised the non-arm’s length expenditure rules that will apply a two-times multiple to the non-commercial arrangement concerning general expenses that are incurred, or effectively not incurred, inside an SMSF.
When it becomes law, the bill will reduce the tax impact where a lower or nil general expense is incurred by an SMSF by imposing an upper cap on the amount that is taxed as non-arm’s length income.
It also provides an upper cap on changes to NALE introduced in s 295-550(1)(b) and (c) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) where the NALE relates to a general expense.
This cap is two times multiple of the amount of the lower general expense for an SMSF or a small APRA fund.
“We have seen this bill now pass through both the Senate and the House of Representatives and it is now waiting for royal assent,” Dunn said.
“Importantly, there are a couple of things to note. Firstly, the legislation will take effect from the quarter following royal assent, which means it will take effect from 1 July 2024, but its effective date goes back to the 2018-19 year.”
Dunn added that this means that it is important to look now to the ATO and its provision of compliance relief through to 30 June 2023 for the general expenses rule.
“It can be confusing because there are two different dates and trustees and advisers do need to be across both those dates and understand some of the nuances between how this applies to general expenses versus specific expenses in the fund,” he said.
“There are some crucial steps that do need to be taken this financial year in respect to things like accounting fees, or financial advisor fees, or even legal fees where they relate to the general expense or their general expenses that can effectively taint all the fund’s income.”
Dunn said funds need to “get some level of commercial reality and respect for those arrangements”, or look to have a policy in place that might apply more broadly across a business and to those that may benefit from maybe getting a free or discounted service.
“Alternatively, they may need to try and evidence the fact that they’re wearing their trustee hat, rather than acting in an individual capacity,” he said.
“This has been going on for some time, but it’s now actually time to make sure the house is in order so you don’t get into this situation where you have no arm’s length expenditure that will invoke the non-arm’s length income rules.”
