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ATO, Strategy

Paperwork and purpose provide NALI protection

SMSF practitioners have been encouraged to ‘over-paper’ their advice to SMSF trustees and members when dealing with non-arm’s-length income (NALI) and to ensure any NALI activity meets the sole purpose test for superannuation.

Argyle Lawyers managing principal Peter Bobbin said he recommends to clients the best way to deal with NALI and any related claims against an arrangement is to ensure they have sufficient documentation in place beforehand.

“Paperwork is how you defend an arm’s-length claim and the more paperwork, the stronger the defence and the better it looks in regards to the ATO,” Bobbin said.

“Clearly, however, if the arrangement is completely off the planet, no paperwork will prove what is terribly wrong or bad. Paperwork of that nature is fraud.”

He said the documentation for a NALI arrangement should be less complex if it relates to regular investments, such as cash or listed securities, but any form of exotic investment should be ‘over-papered’ and exactly matched to the retirement strategy of the fund.

SMSF advisers and trustees needed to keep the purpose of the fund in mind, which is a retirement outcome, instead of emphasising any tax benefits or strategies that may be present in a NALI arrangement, he pointed out.

“To establish or work with or manage or provide advice or an opinion on any transaction, use outcomes language and not tax language,” he said, pointing out cases that used language about tax arbitrage, benefits, advantages and opportunity had been ruled by the courts to be in breach of the sole-purpose test.

“In superannuation you will do yourself and your clients a significant favour if you use outcomes language. Keep the purpose in mind and don’t emphasise tax, but do promote the other outcomes that may be present as well, including estate planning.

“Every finding on a non-complying super sole purpose test has involved non-arm’s-length dealings.”

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