The factors used by the ATO to determine in what capacity an SMSF trustee acts for their fund have remained unchanged in recently released draft guidance, but their application appears to be less rigid, an SMSF legal expert has pointed out.
DBA Lawyers principal Daniel Butler noted Law Companion Ruling (LCR) 2021/2DC, which is a draft revision of the ATO’s rules related to non-arm’s-length income (NALI) and expenditure inside an SMSF, included the change in a section related to capacity in which activities are performed for a fund.
“In the ruling, there’s a range of factors related to skill and knowledge, the sort of services or activities you are performing and if you are using business, professional or employment resources,” Butler said in a recent webinar held by the legal firm.
“The factors also consider if it is minor, infrequent or irregular use of assets, do you have a licence to perform the service and is it covered by insurance and so on.”
Butler noted while these had not changed from the current LCR 2021/2, the ATO had changed the wording as to how it would apply those factors in regards to non-arm’s-length arrangements.
“The ATO now have ‘factors to be considered’ [when determining whether an individual is performing their activities in their individual capacity], instead of the prior wording, which is ‘factors that indicate’ [that the individual is performing their activities in their individual capacity],” he said.
“’Indicating’ is a clearer reference than ‘considering’, so what they are doing is giving a little bit more flexibility in considering factors. It is not as dogmatic or ‘this way or that way’, whereas the prior wording of ‘indicate’ was more directive.”
He said the factors were still relevant for trustees and the onus remained on them when it came to considering non-arm’s-length arrangements.
“Those are the sorts of factors that you need to consider in weighing up whether it is in a trustee capacity or it’s an individual capacity and once it’s getting into an individual capacity, that’s when the ATO will be saying that could give rise to NALI,” he said.
