A sector specialist has warned practitioners situations pertaining to non-arm’s-length expenditure (NALE) involving investment advice can result in the worst possible tax outcome for an SMSF.
To this end, Accurium superannuation adviser Natalie Scott made reference to a situation where a third party is providing advice to an SMSF with regard to an investment platform or wrap account, but not charging the trustees any fee for the service.
Scott noted the circumstances definitely present a NALE issue, but pointed out it goes beyond a matter of whether a general expense, or in this case a discount, has been incurred on a non-commercial basis.
“In this case, if he is doing the work through the financial planning firm he works for and he’s not charging a fee, this would be a NALE issue because he’s not a trustee of the fund so he couldn’t be doing it in his capacity as trustee,” she explained.
“It wouldn’t be a great scenario for the fund either because any of the expenses in relation to the wrap account would relate to all of the shares held in the wrap account as well.
“[This would be of concern for the SMSF], particularly if [the adviser’s service] relates to the acquisition of an asset [using the wrap account] because when we have NALE that relates to the acquisition of an asset, what happens is the asset is tainted for its life.
“[That means] when [the fund] eventually sells it, the capital gain will also [have the] NALI (non-arm’s-length income) [penalties applied to it.”
According to Scott, there is an easy solution for trustees facing a similar scenario.
“Just pay the fee [for the services]. The risks for the fund are quite significant from a tax perspective if you think about [how large a role the wrap account plays in the SMSF]. Quite often the wrap account [is linked to assets] of the entire fund so you’d be paying NALI on the entire income of the fund and any potential capital gains on that wrap account as well,” she noted.
