The ATO does not require an exact figure from trustees when determining an arm’s-length fee for a service charged to the fund, according to a technical specialist.
Heffron head of education and content Lyn Formica said the regulator’s stance is clearly outlined in Law Companion Ruling 2021/2 and trustees are unlikely to trigger the non-arm’s-length expenditure rules as long as they make a reasonable attempt to arrive at an accurate figure.
“Have the parties made a reasonable attempt to work out what the arm’s-length fee would be and charge it? It doesn’t have to be perfect. The ATO has specifically said in their Law Companion Ruling [2021/2] that they are just looking for a reasonable attempt,” Formica said during a briefing held by her firm last week.
“They will not take the time to investigate funds as long as the parties have made a reasonable attempt to do the right thing. For example, if you’re looking at a fund and they paid $1500 in accounting fees and you wonder whether the going rate was really $2000, no one’s going to care.
“I think $1500 compared to $2000 would be considered a reasonable attempt, as long as we’re not suggesting that something cost zero when, in fact, it would have been a service that costs $3000.
“This is one of those situations where you’re not going to get a standard, blanket answer for if the arm’s-length fee is going to be good enough.”
While she pointed out this is the current compliance approach taken by the ATO in relation to general expenses of the fund, it may not always be so, as she expected the regulator to update its guidance and provide more clarity on how specific expenses may be treated.
“We don’t know all the answers yet and we are still waiting for the ATO to review and update their law companion ruling,” she noted.
“We are also waiting for them to re-engage with industry on some draft changes they had made to Taxation Ruling 2010/1. This is the ruling about what is a contribution.
“Essentially, these draft changes could potentially solve some of our problems in relation to specific expense shortfalls, but not necessarily all of them.”
