The SMSF Association has called on the ATO to address several critical issues in its final ruling on how the new rules for non-arm’s length expenses (NALE) will apply.
The ATO issued a draft Law Companion Ruling in 2019 about NALE that it intended to release last year but it was delayed because of COVID. SMSF Association Deputy CEO/Director of Policy & Education, Peter Burgess, said in his “Legs & Regs” update at the 2021 virtual National Conference that opened this morning that this Ruling was one of the most anticipated events on the SMSF calendar this year.
“These new rules will apply in situations where the parties do not deal with each other at arm’s length and the trustees incur an expense that is not on arm’s length terms. In such a complex situation, the Association believes it’s imperative that several questions and points of clarification are addressed in the final ruling.”
The key issues are:
- More examples to illustrate the difference between a service provided by an SMSF trustee in their capacity as a trustee and services provided in their capacity as an individual. In particular, if an SMSF member is qualified and licensed to provide a particular service to the public, will the new NALE rules automatically apply if they provide that service to their fund and don’t charge their fund an arm’s length fee? Or will it depend on the use of business assets and, if so, will there be a materiality test so that incidental use of business assets won’t invoke the new rules?
- If an SMSF acquires an asset and doesn’t incur arm’s length expenditure, does that mean the asset is forever tainted and any capital gains realised when the asset is sold will be taxed as non-arm’s length income even though the fund may have incurred arm’s length expenditure in relation to the asset in all subsequent years? And how will the rules apply to reoccurring expenditure that doesn’t relate to the acquisition of an asset if the fund incurs non-arm’s length expenditure in one year but not in subsequent years?
- How will the new rules apply to issues such as staff discounts? Will the new rules apply in situations where the discount is standard company practice and applies to all staff?
- What evidence will auditors need to obtain to be satisfied that an expense, which has been charged to the fund by a member or a related party for a service provided, is on commercial terms?
Burgess reminded the National Conferences delegates of the need to ensure SMSFs were incurring fees on commercial arm’s length terms now for services provided to their fund by a related party, or by a trustee (who is authorised and licensed to provide that service), and there was a direct link to a particular fund asset.
“The ‘no-compliance’ action approach previously announced by the ATO only applies where the NALE relates to a general fund expense and this transitional period is due to expire on 30 June 2021.”
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National Conference 2021