The SMSF Association (SMSFA) has urged the Federal Government to review the non-arm’s length expenditure (NALE) rules following an Australian Tax Office (ATO) ruling handed down.
Peter Burgess, SMSFA deputy chief executive/director of policy and education, said the ATO ruling was the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019 which could have punitive unintended consequences.
“[The] ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund,” Burgess said.
“This means situations could arise where a self-managed superannuation fund (SMSF), which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.
“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”
The underlying policy rationale of the NALE rules was to ensure all SMSF transactions occurred on arm’s length terms.
“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate,” Burgess said.
However, the SMSFA said the ruling did provide several examples of situations where the trustee provided a service to their own fund for no charge that does not result in NALE.
“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service,” Burgess said.
“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.
“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.
“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business.
“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI.”
