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LCR 2021/2 – discounts to SMSFs invoke NALI

By Zacharia Galloway and Daniel Butler
10 September 2021 — 6 minute read

The Australian Taxation Office’s ruling, Law Companion Ruling LCR 2021/2, outlines the application of the ATO’s view on the non-arm’s length expenditure (NALE) provisions, and clarifies when and where an outgoing, expenditure or loss can constitute non-arm’s length income (NALI).

The ATO’s view is that, where an expense is incurred by a fund that is less than an arm’s length amount, all of the fund’s ordinary income and statutory income (including net capital gains and concessional contributions) is NALI and, after attributable expenses, is taxed at 45 per cent.

This is of particular concern as the ATO considers that NALI can apply to all of a fund’s income even for an immaterial general fund expense, eg, a $100 discount to an accounting fee can result in $45,000 tax if an SMSF’s taxable income is $100,000 in a given income year.

The ATO’s general fund expense “nexus” view is much broader than what numerous professional and industry bodies submit is what the NALE legislative changes introduced from 1 July 2018 was intended to have (which the ATO believes is the better view of the law).

We have previously covered the nexus issue when discussing the prior draft ruling LCR 2019/D3 and you can click here to read that article. Unless legislative change is introduced, ultimately, the ATO’s view may need to be tested in the courts to determine which is the better view. For example, many argue that a $100 discount to a well-diversified SMSF would have a remote or tenuous nexus, if any, to all of a fund’s income.

The ATO view becomes even more interesting when applied to a large APRA fund with millions of fund members, many of whom are blue-collar workers receiving minimum compulsory employer superannuation guarantee (SG) contributions. Theoretically, a $100 discount to such a large APRA fund can result in substantial tax especially considering that all of the APRA fund’s income (including the millions of members’ SG contributions) would be taxed at 45 per cent. While the ATO is aware of the substantial ramifications resulting from its general fund expense theory, it states at [91] in LCR 2021/2:

the Commissioner is alive to concerns that a finding that general fund expenses are non‑arm’s length is likely to have a very significant tax impact on the complying superannuation fund, even where the relevant expenses are immaterial.

Numerous adviser and accountant firms provide discounted services to their employee’s SMSFs. Any discounted services may unwittingly expose funds to NALI. However, the ATO has offered several practical concessions where a fund receiving discounted services may not enliven NALI.

When a general expense may constitute NALI

Example 2 of the LCR 2021/2 demonstrates that a general expense such as an accounting fee may have a sufficient nexus to all of the ordinary and statutory income derived by a fund for an income year.

Example 2 – [NALE] incurred has a nexus to all income of the fund – NALI

  1. For the 2020-21 income year, Mikasa as trustee of her SMSF engages an accounting firm, where she is a partner, to provide accounting services for the SMSF. The accounting services include services other than those relating to complying with, or managing, the SMSF’s income tax affairs and obligations. The accounting firm does not charge the SMSF for those services as a result of non-arm’s  length dealings between the parties (and not as part of any discount policy referred to in paragraph 51 of this Ruling).
  1. For the purposes of subsection 295-550(1), the scheme involves the SMSF acquiring the accounting services under a non-arm's length arrangement. The [NALE] (being the nil amount incurred for the services) has a sufficient nexus with all of the ordinary and statutory income derived by the SMSF for the 2020-21 income year. As such, all of the SMSF’s income for the 2020-21 income year is NALI.
  1. Subsection 295-550(1) would cease to apply if the arrangement changes for the 2021-22 income year so that the SMSF incurs expenditure for the accounting services provided by the accounting firm of an amount that would have been expected to be incurred where the parties were acting at arm’s length. In this situation, none of the SMSF’s income for the 2021-22 income year is NALI.

The above example highlights the scope of the NALE provisions based on the ATO’s construction of the “nexus between the scheme and the expense. Thus firms that offer discounted services to their partners, directors, employees or shareholders SMSFs should carefully review their practices and revise their policies to minimise NALI risks.

There are circumstances where a service conducted by a trustee in their capacity as a trustee of a fund does not result in NALE. For example, an SMSF trustee cannot be remunerated for duties or services performed in their capacity as a trustee (see s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth)). However, where a service is carried out by a trustee acting in an individual capacity especially where business, employment, or professional resources are used (e.g. equipment, software, licences or professional indemnity cover), if the services are not remunerated at arm’s length rates or where there is no remuneration, NALE can be invoked and all of the income of the fund for the income year can be assessed as NALI. Paragraph 49 of LCR 2021/2 illustrates this points and states that:

….  For example, the [NALE] provisions will apply where a trustee (being an accountant by profession) contracts the bookkeeping or accounting services to their accounting firm, which charges non-arm's length rates.

The NALE provisions will be invoked where services are provided where the remuneration charged to the fund is at non-arm’s length rates or where no remuneration is charged.

Can an SMSF receive discounted services without NALI?

LCR 2021/2 provides some scope for a discount policy to be in place for services provided to SMSFs of employees, partners, shareholders or office holders. Paragraph 51 provides the following:

  1. A complying superannuation fund might enter into arrangements that result in it 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.

An example of this provided in example 8:

Example 8 –  third party providing services – discounts

  1. Sasha is the trustee of her SMSF of which she is the sole member. She is also an employee of Eren & Co Accountants.
  1. Sasha engages Eren & Co Accountants to provide accounting services to her SMSF. Sasha is entitled to a staff discount rate that is available to all staff of Eren & Co Accountants. Sasha is charged the discounted rate for these services.
  2. As the discount is available to all staff of Eren & Co Accountants and is not able to be influenced by Sasha, the discounted rate has been provided on an arm’s length basis. Accordingly, the [NALE] provisions will not apply.

As noted in the above example, where the discount is consistent with standard commercial practice is offered to all employees, etc, and where the trustee is unable to have influence over the employer, a discount can be provided without invoking NALE.

The discount provided must be in accordance with standard commercial practice and covers services provided by the firm and is reflective of the same type of discount that similar firms are likely to provide in similar circumstances. Further, there must be no influence by the SMSF trustee in obtaining any discount.

Naturally, smaller firms may have greater difficulty proving that an employee, partner, shareholder or office holder does not influence the firm’s discount policy.

ATO concessions

The ATO’s Practical Compliance Guideline (PCG) 2020/5 provides that:

  1. The ATO will not allocate compliance resources to determine whether the NALI provisions apply to a complying superannuation fund for the 2018–19, 2019–20, 2020–21 and 2021–22 income years where the fund incurred non-arm’s length expenditure (as described in paragraphs 9 to 12 of LCR 2019/D3) of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in those respective income years (for example, non-arm’s length expenditure on accounting services). This transitional compliance approach only applies to general expenditure that is incurred on or before 30 June 2022.
  1. This transitional compliance approach does not apply where the fund incurred non-arm’s length expenditure that directly related to the fund deriving particular ordinary or statutory income.

Thus for the period of 1 July 2018 to 30 June 2022, the ATO is not actively seeking to apply NALE of a general nature. Moreover, after 30 June 2022, the ATO does not propose to apply NALE of a general nature where the parties have made a reasonable attempt to determine an arm’s length expenditure amount for services provided to a fund (see LCR 2021/2 at [92]).


Firms should have clearly communicated discount policies that are supported by appropriate benchmark evidence for any discounted services offered to employees, partners, shareholders or office holders or their related parties, otherwise NALI may apply where an SMSF is provided any discount or free service.

Note that the ATO views above have proven quite controversial and numerous professional and industry bodies are seeking to have the above position changed and clarified. Accordingly, any discount policies should be carefully reviewed and revised to ensure they are appropriate given the ATO’s recently developed theory that a general expense taints all fund income (including ordinary and statutory income and also all concessional contributions including compulsory minimum SG amounts).


By Zacharia Galloway, Lawyer (This email address is being protected from spambots. You need JavaScript enabled to view it.) and Daniel Butler, Director (This email address is being protected from spambots. You need JavaScript enabled to view it.), DBA Lawyers

LCR 2021/2 – discounts to SMSFs invoke NALI
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Tony Zhang

Tony Zhang

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.

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