The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down today.
Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit today, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”
“Today’s 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.
“This means situations could arise where an 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.”
Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur 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.”
On a positive note, the ruling does provide several examples of situations where the trustee provides 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.
“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,” Burgess says.