ATO, Tax

ATO pushes NALE action out by year

ATO NALE action

The ATO has pushed out any action on non-arm’s-length expenditure (NALE) of a general nature by a year but has not finalised its position on the matter.

The ATO has announced it will not take action regarding non-arm’s-length expenditure (NALE) of a general nature that has a nexus to other SMSF income for the 2021 financial year, effectively deferring its final position for a year.

“The ATO will not allocate compliance resources to determine whether the NALI (non-arm’s-length income) provisions apply to a complying superannuation fund for the 2018/19, 2019/20 and 2020/21 income years where the fund incurred NALE of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in those respective income years,” the regulator announced in Practical Compliance Guideline (PCG) 2020/5, released on 1 June.

The document is framed in a similar way to PCG 2019/D6, in which the ATO announced its initial no-action stance for the 2019 and 2020 income years and where it also stated the guideline would not apply to later years, however, that reference has been removed from PCG 2020/5.

The ATO noted the guideline should be read in conjunction with draft Law Companion Ruling (LCR) 2019/D3, which specifically addresses expenditure incurred under a non-arm’s-length arrangement, as well as the nexus between the NALE and the ordinary and/or statutory income derived by the fund.

The ruling stated where a fund acquires services under a non-arm’s-length arrangement, such as those of an accountant or adviser running their own fund, the nexus is sufficient to render all income in the fund as NALI and taxed at 45 per cent.

This position has led to financial advisers and accountants seeking clarification on how it will affect any work they carry out on behalf of their own funds, as well as to the ATO releasing its first no-action transition relief position.

In PCG 2020/5, the ATO noted it had received feedback regarding LCR 2019/D3, which was being considered in the finalisation of the draft ruling, but did not provide a time frame as to when that would be completed.

Commenting on the release of PCG 2020/5, Heffron managing director Meg Heffron said while the ATO did not finalise its ruling, the no-compliance position for the 2021 income year was the “next best thing”.

Heffron also highlighted that while SMSF practitioners can still work on their own funds, the limits first applied by the ATO in regards to NALE and investments still applied.

“The only change made by this new release is to extend the transitional compliance approach to 2020/21 as well. So those of us with SMSFs where we use work resources to complete the accounts and tax return have one more year where we can put off deciding what to do,” she said.

“Note that like the draft, this transitional relief only applies to NALE that cannot be specifically attributed to an investment and instead relates to the fund as a whole – for example, accounting fees.

“NALE that relates to a specific investment – for example, an artificially low interest rate charged on a limited recourse borrowing arrangement used to acquire a property – will ensure that all income associated with that asset is NALI.”

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