The pricing of general expenses related to an SMSF that may be considered non-arm’s-length expenses (NALE) is likely to be difficult and is one of the reasons the ATO extended its no-action position on the matter until mid-2021, according to a technical expert.
SMSF specialist adviser Mark Ellem said financial advisers, accountants and real estate agents who provide services to their own SMSFs in their capacity as an individual, and not a trustee, will be subject to the NALE provisions under tax laws, which impose a 45 per cent tax rate on all the income of the fund.
Speaking as part of a recent Accurium webinar, Ellem said the application of the NALE rules was outlined by the ATO in Law Companion Ruling (LCR) 2019/D3 and since its release in 2019 it has received numerous submissions on the issue.
“This is a big issue for practitioners, particularly the NALE impact on general expenses counting the whole of the SMSF income with punitive tax being applied,” he said.
He pointed out that if the finalised LCR, which is currently in draft form, allows practitioners to charge an arm’s-length price to provide services to their own SMSF, questions remain over how that will be decided.
“If we are going to charge an arm’s-length price, let’s say finalisation of the LCR says we have to charge for general expenses, who and how are we going to determine an arm’s-length price?” he said.
“The Explanatory Memorandum [to the Treasury Laws Amendment 2018 Superannuation Measures No 1) Act 2019, which gave effect to the provisions] did acknowledge it may be difficult to determine an exact price that is non-arm’s length for these components and future guidance on how to substantiate a price would be greatly received.”
He also raised the issue that each part of servicing an SMSF as a practitioner would have to be priced separately.
“For example, if I process my fund at home using my business software, but do not lodge my return under my tax agent number, and it is covered by my professional indemnity insurance, how do I determine an arm’s-length price for all the bits and pieces? How do I break it down?” he said.
He noted the ATO had recently finalised a Practical Compliance Guideline on NALE and had extended the period in which it would not take compliance action to include the 2021 financial year, which would allow the regulator more time to resolve the issue and provide a practical outcome.
A number of solutions were readily available and the ATO could adopt a de minimis rule, or ‘goods for own use’ approach, that already exists within tax law, but practitioners would need time to review any position taken by the regulator and modify any arrangements before 1 July 2021, he said.
