Pro-bono work conducted by financial advisers for SMSFs may inadvertently create a non-arm’s-length expenses (NALE) arrangement for the funds, as will any discounts applied to services provided to a fund, according to an SMSF consulting group.
Speaking as part of a webinar last Friday, Heffron SMSF technical and education services director Leigh Mansell said the examples supplied in the ATO’s Draft Law Companion Ruling 2018/D10 covered the events when anaccountant, financial adviser or real estate agent managed their own affairs within an SMSF, but NALE would apply to any advantage gained by a fund, including free advice or discounted services.
“All the examples are accountants or property managers, but if there is a discount in wrap fees, platform fees, stockbroker fees, or any sort of discount given to people or their fund, regardless of whether it is given from a related party or a non-related party, it is reading as though the fund is at risk of coming under NALE,” Mansell said.
“The eye-opener for us was that anybody who can provide services to the fund might get caught by this, not just accountants, and it is not just services.
“It could be discounted fees or pro-bono work that may be done and if an adviser has a small part of their client base where they provide services for no costs, they might find this creates a problem for those funds because it will be considered as expenses that are at less than arm’s length.”
She said while the ATO has indicated it would not look to enforce the NALE provisions until the 2021 financial year, their application was unexpected.
“This feels like it has been sprung on us because I don’t think anybody thought this was how the ATO would interpret the law because this is not what the explanatory memorandum [for changes to section 295-550 of the Income Tax Assessment Act 1997] said,” she said.
“This is a draft and we are getting a lot of questions on this and hopefully this is a storm in a teacup. Submissions closed in mid-November and we might find the final version of the ruling is different and a non-event.
“We will not get caught by NALE this year, but people might need to put themselves on a watch list to do something from 1 July 2020 so that everything aligns with arm’s length, and I suspect it will be at the death of the next financial year before we get finalised guidance.”
