ATO, Superannuation

NALE may be proving ground for legal challenges

SMSF trustees need to take into account certain legislative and regulatory changes that will come into effect from 1 July 2021.

SMSF trustees need to take into account certain legislative and regulatory changes that will come into effect from 1 July 2021.

The recent focus on non-arm’s-length expenditure (NALE) by SMSFs is unlikely to be an effort to identify where trustees are not charging themselves for services, but a move to toughen laws related to non-arm’s-length arrangements ahead of any legal challenges, according to an SMSF lawyer.

DBA Lawyers senior associate William Fettes said other laws used by the ATO in the past had been negatively tested in court and the regulator may be seeking to avoid that in this area.

“I don’t believe the mischief the ATO or Treasury has identified is in relation to accounting fees for SMSFs, but there must be a sense in which the ATO wanted to have a clearer position to run these cases if they have to and not see NALI (non-arm’s-length income) having holes poked in it,” Fettes said.

“There has not been a lot of case law in this area. There has been some on special income and a recent case on dividends and associated income, but not much case law around NALI and the general non-arm’s length provisions.

“If you look at the old anti-avoidance provisions – those went down in flames and had holes poked in them by the court.

“The ATO has learned that lesson, which is possibly the genesis for this [focus on NALE] as they want a stronger position so they can use NALI more aggressively and assertively, and if it did come to litigation, they are not worried about these technical deficiencies.”

He added non-arm’s-length provisions could also be used by the ATO to clean up limited recourse borrowing arrangements (LRBA), but this had not taken place due to possible deficiencies related to NALE that had yet to be corrected.

“Remember how long it took the ATO to crack down on LRBAs and related-party loans and there was a deadline, then it was extended, and it was all very serious, but we have not actually seen a lot of activity,” he said.

He pointed out that if NALE went beyond LRBAs, it was unlikely Treasury would move quickly to offer relief, based on previous responses to the sector.

“Treasury is not enamoured of SMSFs. When we look at actions around different types of pensions in SMSFs where there are problems, and there are still defects in laws around older pensions in SMSFs, there is no real appetite to fix it,” he noted.

“There are competing priorities for action, but this issue does make it more difficult. If I put a positive spin on it, it could be they want to have the law operate as they believe it was intended to operate, but making life hard for SMSFs has never lost anyone too many votes.”

NALE remains an area of concern for SMSF practitioners who are seeking fine-tuning around how its provisions will operate and noting that without these advisers will face a range of bizarre scenarios related to their own work with SMSFs.

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