Breaches of non-arm’s-length arrangements are a key compliance tool being used by the ATO to crack down on property development within SMSFs, with the regulator taking a less conciliatory approach than it has in the past, according to an SMSF legal expert.
Sladen Legal principal Phil Broderick said SMSFs can be reviewed from a superannuation and tax perspective by the regulator, but the potential existence of non-arm’s-length income (NALI) within property development in an SMSF means its focus for these funds has shifted to the latter.
“My experience and the material coming out from the ATO indicates NALI is their biggest weapon against SMSFs and property development,” Broderick said at the Chartered Accountants Australia and New Zealand National SMSF and Financial Advice Conference 2023 in the Hunter Valley late last year.
“While there are plenty of SIS (Superannuation Industry (Supervision)) Regulations that can also be caught up, that’s not what I am seeing in practice because all of the NALI audits that I’ve seen in the last few years have come out of the tax team.
“A lot of these NALI audits come out of the top 5000 [tax review] program, which is under their tax team and if they spot issues through their tax lens, it will be treated as NALI and the superannuation regulatory provisions are an afterthought, which is very different from 10 years ago.”
He said the SMSF clients of advisers, accountants and lawyers need to be given specific warnings that property development is of concern to the ATO and carries a higher risk of an audit, particularly with related-party dealings, and mistakes will be penalised even if disclosed to the regulator.
“In relation to voluntary disclosures, we used to get really good outcomes but in more recent times they haven’t been great and the ATO appear to have changed their practices,” he said.
“Previously, if you went to the ATO and fessed up with plans to rectify, you got a slap on the wrist, but they are now giving out significant penalties.
“From what I gather, this is the ATO’s way of saying you can’t get away with breaches, even if you voluntary disclosure them, and you will still receive some sort of penalty, which does put people off in relation to whether they make disclosures.”
