SMSF practitioners should not confuse the nature of what is being considered under the non-arm’s-length income (NALI) provisions, with the law focusing on the basis of the dealing and not the parties involved, an SMSF specialist adviser has noted.
Vincents superannuation advisory director Mailene Wheeler said there is a misconception NALI is dependent on the relationship between the parties, but that is not how the legislation and case law view these tax provisions.
“I’ve often heard accountants argue, especially when they are trying to look into doing an investment or client transactions, that since the parties are not related there is no arm’s-length issues involved,” Wheeler said during a presentation hosted by The Auditors Institute yesterday.
“It is really important to stress that dealing at arm’s length refers to the arm’s-length basis of the dealing, not the parties.”
Wheeler noted the Income Tax Assessment Act 1997 definition of arm’s length under section 995-1, which states “in determining whether parties are at arm’s length, consider any connection between them and any other relevant circumstance”, was vague and its application under law provided more certainty.
“This statutory definition does not explain the term, rather it contains a direction of how to determine whether parties are dealing with each other at arm’s length. However, we do have enough tax rulings and case law which have covered off on what arm’s length means,” she said.
Wheeler pointed to the case of Australian Prudential Regulation Authority v Derstepanian (2005), which stated arm’s length implies a dealing is being carried out on commercial terms.
She also highlighted the case of Granby Pty Ltd v Federal Commissioner of Taxation (1995), which considered how parties in a transaction would behave if acting at arm’s length when conducting their affairs.
Additionally, she pointed to the case of Barnsdall v Federal Commissioner of Taxation (1988), which assessed that if parties dealt with each other as arm’s-length parties normally do, was the outcome of those dealings a matter of real bargaining.
“The extracts that I mentioned from case law make it clear that for the purposes of the NALI provisions the key consideration here is not whether the parties are at arm’s length, but they are dealing with each other on an arm’s-length basis,” she said.
“Parties that are not at an arm’s-length basis may still deal with each other on an arm’s length and vice versa.”
