SMSF trustees are still struggling to come to terms with the requirements of non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) rules and have been warned not to rely on private rulings from the ATO.
Cooper Grace Ward partner Clinton Jackson said SMSF trustees were not giving enough attention to both the NALI and NALE rules when dealing with related-party assets and loans.
“Where we are having any related-party transaction at all, the SMSF trustees are not doing the necessary homework,” Jackson said during the firm’s recent Annual Adviser Conference.
“They are not getting the third-party evidence to prove the transaction is arm’s length or when they do, it’s just a single-line document listing the interest rate.
“What about the rest of the terms of the loan? For a transaction of a loan to be arm’s length, we need to know the interest rate, how long the loan is for, what is the repayment requirements and all those kind of details.”
He said as a result of this failure to understand the arrangements and source the correct information, trustees have been asked to return with it at a later date.
“What we are seeing when people come to us to ask about NALE is we are often sending them away to go and do that homework again,” he said.
“If that is what we are seeing when the clients are trying to get it right, I would hate to see what they are doing when they are not putting in any effort at all.
“The ATO will continue to hammer this issue because they are onto a winner.”
During the same presentation, Cooper Grace Ward partner Scott Hay-Bartlem added SMSF trustees who had received a private ruling from the ATO in regards to non-arm’s-length arrangements should not rely on them unless they are certain the rulings are still current.
“There are people out there with private rulings on NALE from about 10 years ago, but if you look at private rulings, they are only given for a particular period and it won’t be for the life of the investments,” Hay-Bartlem said.
“If you are relying on an old ruling, and the ATO were giving out rulings on limited recourse borrowing arrangements for a long time, stating they were NALE problems, go back and check the ruling as the time may have expired or it may be subject to a law change and no longer applicable.”
