ATO, Regulation

NALE not critical issue for ATO


The tax implications for SMSFs resulting from the new non-arm’s length expense (NALE) provisions are not being seen by the ATO as a major concern

The ATO does not consider the consequences of the new non-arm’s length expense (NALE) rules as being a significant problem for SMSFs, a technical expert has said.

“The ATO doesn’t see this as a critical problem in the industry. So it is trying to work with the industry to come up with a palatable solution because, while it has certainly blown up in the industry, it’s not something the ATO sees as a significant area of risk,” Smarter SMSF chief executive Aaron Dunn said during his most recent technical webinar hosted yesterday.

He added the ATO is looking to find a workable solution to the application of the new NALE rules because the resulting adverse situations for SMSF that have now been discovered are unintended.

“This is not really what the industry was expecting and arguably not what the ATO was wanting in how to potentially interpret the way in which these rules should actually be applied,” Dunn explained.

He pointed out the situation for accountants servicing their own SMSFs using an associated market based fee as being the most concerning because the administration function they are performing for the fund has a nexus to all of the assets in the fund and, by extension to all of the revenue generated from those assets.

In turn it means the revenue from all of those assets would be classified as non-arm’s length and as such be taxed at the highest marginal rate, Dunn said.

He noted this would be the case regardless of whether all of the income arrangements for the assets in the fund had been derived at market rates, such as rental from an investment property.

Further, Dunn warned the interpretation of NALE focused upon the notion of capacity and not just the administration fee charged.

“[The assessment will] look at all the activities that were being undertaken, like whether the computer was being used at the firm, or whether staff were being used at the firm, etcetera, etcetera to work out whether this is an issue or not,” he warned.

SMSF practitioners have earlier raised their concerns over the operation and interpretation of the NALE provisions.

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