Financial Planning

Advisers seek NALE fine-tuning

Non-arm’s-length expense

The new non-arm’s-length expense rules governing SMSFs need further clarification as to how they will be applied in some particular situations, financial advisers have said.

Advisers have expressed concerns over certain aspects of the new non-arm’s-length expense rules regarding SMSFs and how they will be applied both immediately and in the future.

One of the issues causing considerable angst, raised at the recent Self-managed Independent Superannuation Funds Association 2019 SMSF Forum in Melbourne, centres on arrangements accounting firms make for the administration of funds where the trustees are employees of the company.

Administration services in these circumstances are either charged at below-market rates or in some instances at no cost to both former and current employees.

Advisers said these arrangements are worrying due to the potential magnitude of how they are categorised as a nexus exists between the administration of an SMSF and all of the revenue generated by the fund, meaning all of the fund’s income could end up being treated as non-arm’s length, resulting in having the highest marginal tax rate applied to it.

In response, the ATO said it was conscious of this anomaly and was working to find a practical solution to the issue.

The other matter raised referred to limited recourse borrowing arrangements (LRBA) and how a below-market interest rate would affect an asset’s capital gain.

“Say, for example, the LRBA had an interest rate that was less than the market rate, so it’s NALI (non-arm’s length income) for that year. But the explanatory memorandum says it would taint the asset on the subsequent sale. But that sale could be years down the track and in the meantime the loan terms may have been rectified,” KPMG enterprise director Julie Dolan pointed out.

“It seems to be very black and white and there doesn’t seem to be any allowance for when the arrangement has been rectified. Does that mean the asset is tainted forever?”

In response, ATO SMSF segment assistant commissioner Dana Fleming said: “That’s a really good point and we should have that publicly explained.”

Late last month, SuperConcepts technical services and education general manager Peter Burgess said the new non-arm’s-length expense rules had also raised concerns for accountants and financial planners who operated their own SMSF who may have trouble differentiating what would fall under the new rules and what may be exempt.

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