The ATO should provide more clarity and guidance on how it will treat the activities of a trustee who provides a professional service and where that service can be used in their capacity as a trustee or as an individual under non-arm’s-length expenses (NALE) rules, according to the SMSF Association (SMSFA).
SMSFA deputy chief executive and policy and education director Peter Burgess said this guidance was a key issue the ATO needed to expand upon in its final NALE ruling.
During his presentation today at the virtual SMSFA National Conference, Burgess said the ATO had already released a draft law companion ruling in 2019 about NALE, but a final version had been delayed by COVID-19 measures and a number of issues were still of concern to the association.
“We have a wish list in terms of what we want to see in that final ruling and first of all we would like to see some more examples of what constitutes a service provided in the capacity of a trustee versus a service provided in the capacity of an individual,” he said.
“Does it [automatically] mean a trustee who is licensed and qualified to provide a particular service to the general public, if they provide that service to their fund and don’t charge their fund an arm’s-length expense that these new provisions will be invoked?
“Does it depend whether they’re using the business assets to provide those services, and if it is depending on that, will there be a materiality test so we avoid situations where the incidental or trivial use of business assets give rise to all the income of the fund being taxed as non-arm’s-length income (NALI)?
He said it was hard to gauge how many SMSFs may be affected by the NALE provisions, but it was also difficult to estimate how many may be engaging in this type of behaviour.
“There are not too many funds that look like this and have those type of assets and those types of members with these skills, but if they have one or more members of the family who are qualified and licensed to provide a particular service to the public, there’s a possibility they might be providing that service to their SMSF,” he noted.
“For now we don’t know how many SMSFs have professional members, but you would have to think that it’s not insignificant in terms of number of funds that might have members like that and could potentially be impacted by these new changes.”
Burgess also said the SMSFA was seeking clarity around the acquisition of assets by a fund where it did not incur arm’s-length expenditure at that time.
He questioned whether that action would mean the asset was forever tainted and any capital gains realised when the asset was sold would be taxed as NALI, even where the fund may have incurred arm’s-length expenditure in relation to the asset in all the years after its acquisition.
Additionally, he asked if the NALE rules would also apply to reoccurring expenditure that did not relate to the acquisition of an asset if the fund incurs NALE in the first year but not in any subsequent years.
He also pointed to the need for clarity around staff discounts, particularly where it was a standard practice and applied to all staff, and the difficulties faced by auditors in seeking information to be satisfied that an expense, which has been charged to the fund by a member or a related party for a service provided, was on commercial terms.
