Shelley Banton, head of technical at ASF Audits, has said in a recent webinar that although the regulator indicated the draft ruling on non-arm’s length income would be finalised in February, it is still not available.
“There are still a lot of questions and no answers, because apart from what’s in the draft ruling, we’ve had no additional guidance from the ATO,” she said.
One of the first issues that needs to be clarified, Banton said, is what exactly “passes muster” as an arm’s length price or a value.
“We see professional valuers ‘provide a range in their market values’, so is a trustee supposed to just look at the highest and the lowest in the market and take the midpoint? Should it be the lowest, or should it be the highest? What sort of evidence do we need to keep?”
“Of course, the answer will be as much as possible, but is there a difference between what’s expected from the ATO for CGT purposes compared to NALI purposes, and how does that all work? What about historical acquisitions? It’s very complicated, and we’re still waiting.”
She continued that there is one element of the NALI ruling that is easier to navigate from an ATO perspective, which is when the fund receives a discount from a firm with which the trustee is associated.
“You just need to follow the bouncing ball, because, once again, it all comes down to documentation. Where a trustee performs services for remuneration, where there’s no discount policy in place and no fee charge, then NALI is going to apply.”
“A good example here is a trustee who is an accountant, and they contract the bookkeeping or accounting services to their accounting firm, which charges non-arm’s length rates, then NALI will apply. The way to get around this and not have the NALI provisions triggered is to, firstly, ensure that arm’s length charges are paid by having a commercial pricing policy in place by the firm where the fund does receive a discount.”
This can then still be on arm’s length terms, as long as the discount policy is provided to all employees, partners, shareholders and office holders of that firm. The trustee should not be able to influence that policy, which means that the trustee cannot be a sole trader.
“But what about where the fund pays nothing for the service? Well, that can still be at arm’s length, as long as the trustee can’t influence the firm’s decision to charge anything. So once again, sole traders are missing out,” Banton said.
She added that if the pricing policy is based on a cost recovery basis, then unless it’s in the discount policy, it’s considered inconsistent with an arm’s-length dealing.
“Firstly, the service provider has to have the discount policy in place, and it needs to be written down so they can hand that over to the ATO on a moment’s notice. If you’ve got a verbal discount policy in place, it’s not worth the paper it’s written on.”
“The best help here is through LCR 2021/2dc, paragraphs 49 to 53. That will provide an overview of how it should work, but apart from that there is no other guidance, so the more documentation you have, the better until the ruling is finalised and we get some information from the ATO.”
However, the question remains as to whether a discount policy can apply or an arm’s length remuneration has to apply.
“It’s all to do with what the person does in their capacity as a trustee versus what they do in their capacity as an individual. We know that a trustee can’t receive any remuneration when they’re undertaking their duties as a trustee, because s17a says that as under this section trustees are required to perform actions which are put on them by the SIS Act the trust deed, and any other duties they have imposed under the law,” Banton said.
“An example here is where you’ve got a trustee who’s a financial advisor. They’re using their skills and knowledge in deciding that investment strategy for the fund as the trustee. They can do that without the fund incurring non-arm’s-length expenditure. What that also means is that when the trustee is using their skills in a minor, infrequent or irregular use, the fund doesn’t need to be charged.”
Just a point, why do you need “guidance from the ATO”? Their view is not more legitimate than any other informed view. Ultimately, if it comes to it, the ART/Court will have a view which may well be different anyway. In my view, waiting on a “view” from the ATO is a lazy advisers way out – what about putting your professional advice to the test?