Firms providing discounted SMSF services to staff need an appropriate discount policy ASAP
It is critical that firms providing discounted SMSF services to staff, including partners, shareholders and office holders, take action as soon as practicable to ensure they have an appropriate discount policy in place.
If a firm’s discount policy is not in line with the ATO’s position in Law Companion Ruling LCR 2021/2, this is likely to result in a non-arm’s length expense (NALE) for any staff member’s SMSF that obtains discounted services. NALE can give rise to a substantial tax liability under the non-arm’s length income (NALI) provisions in s 295-550 of the Income Tax Assessment Act 1997 (Cth).
DBA Lawyers is assisting a number of firms in relation to documenting an appropriate SMSF staff discount policy and providing training in relation to managing NALI/E issues. This article outlines some of the key points for firms to consider.
Under current law, an SMSF incurring a general fund expense (e.g., for accounting or audit services) that is NALE, or a nil expense where an expense should have been incurred if the parties were dealing at arm’s length, can result in a 45% tax liability applying to the following financial year of the NALE:
- all of the fund’s ordinary income;
- all of the fund’s statutory income (including net capital gains and franking credits); and,
- assessable contributions received by the fund.
A 45% NALI tax rate also applies even if an SMSF is in the pension or retirement phase.
This outcome is based on the ATO’s view that a lower or nil general fund expense has a sufficient nexus to all the fund’s income (including both ordinary and statutory income).
Although the ATO’s Practical Compliance Guideline PCG 2020/5 previously provided some relief (i.e., the ATO was not applying its compliance resources to general NALE in respect of the 2018–19 to 2022–23 financial years), this transitional compliance approach ceased on 1 July 2023. Accordingly, from 1 July 2023, it is critical that discount arrangements are revised to minimise NALI/E risks moving forward.
An appropriate staff discount policy is in both the firm’s and staff’s best interests.
Proposed NALE legislation
On 19 June 2023, Treasury released Exposure Draft ‘Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non-arm’s Length Expense Rules for Superannuation Funds’ (NALE Bill) together with Exposure Draft Explanatory Materials.
The NALE Bill proposes a cap on the amount of income that will constitute NALI from a non-arm’s length scheme involving a lower or nil general fund expense. This cap is in the form of a two times (i.e., 2 x) multiple of the amount of the lower general expense for an SMSF or a small APRA fund. However, under the NALE Bill, the 2 x cap does not apply where the general expense is capital in nature.
The NALE Bill is also expected to include other important measures, such as excluding assessable contributions from NALI (which are included under current legislation).
While these proposed legislative changes would reduce the severe impact of NALE for general SMSF expenses, these changes are still to be finalised and passed as law. Accordingly, it is strongly recommended that firms act now to finalise their staff discount arrangements.
In paragraph  of LCR 2021/2, the ATO states that discount arrangements that are provided under an appropriate discount policy will not give rise to NALI:
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.
Thus, there are a number of key points to consider, including:
- There must be a policy framework in place (i.e., a formal policy document outlining the terms of the discount).
- The discount must be consistent with normal commercial practice (i.e., based on appropriate benchmark evidence).
- The same discount must be provided to others of the same class (i.e., the eligibility rules should have a class-based application).
Discounts for non-SMSF work
There is no express ATO guidance in LCR 2021/2 regarding staff discounts being offered in relation to non-SMSF services, e.g., in relation to accounting services provided to unit trusts or companies that a staff member’s SMSF may be invested in. Thus, the staff discount policy should be limited to SMSF services only.
However, if discounts are being offered to unit trusts or companies that are linked to a staff member’s SMSF, this would need to be based on appropriate and sufficient objective benchmark evidence to support such discounts. Also, services provided to another entity should be invoiced separately and paid for by the relevant entity so there is a clear separation from SMSF invoicing.
DBA Lawyers can assist
DBA Lawyers has been assisting a number of firms in relation to putting in place an appropriate staff discount policy to address potential NALI/E exposures associated with discounted SMSF services being provided to staff members’ SMSFs.
DBA Lawyers offers the following services in this regard:
- Assisting firms to formulate an appropriate discount policy and providing updates and monitoring on NALI/E risks; and
- Providing in-house training and education in relation to NALI/E issues.
If you wish to proceed with this service, we issue an initial questionnaire to complete to prepare the documents. We also recommend an initial Zoom conference with the firm’s key stakeholders to ensure the documents are correctly positioned and to discuss the various options that can be included or excluded from the policy, e.g., should the policy cover all employees, partners, shareholders and office holders or only certain categories.
Firms providing discounted services to staff members’ SMSFs should take action as soon as practicable to minimise NALI/E risks.
DBA Lawyers can assist clients in formulating, documenting and putting in place an appropriate staff discount policy, as well as training and advice in relation to managing NALI/E risks.