SMSF advisers and trustees need to be mindful that while the non-arm’s-length expenditure (NALE) rules are effective from 1 July 2018, they can still have a retrospective impact on schemes entered into before this date, a specialist lawyer has warned.
“Just be aware that the NALI (non-arm’s-length income) changes [as a result of NALE] may be broadly referred to as applying from 1 July 2018, but that doesn’t matter if the scheme that we’re talking about [is] pre-existing [of] 1 July 2018,” DBA Lawyers senior associate William Fettes told attendees of his firm’s latest SMSF online update.
“For example, if you have an SMSF that acquired an asset back in 2000, that doesn’t mean it couldn’t be exposed to NALI [and NALE] based on that acquisition or that non-arm’s-length outgoing occurring prior to 1 July 2018.
“So regardless of how you might finesse it, [the law is] going to look back at the history.”
According to Fettes, this operational aspect of the law, and the administrative approach the ATO adopts towards it, demonstrates how easy it can be to fall foul of the NALE provisions.
“So you won’t get a pass from things that are argued based on that 1 July 2018 date. The ATO has an ability to look back at the antecedent historical conduct and transactions and unpack that and nitpick on those points,” he said.
The changes to the NALI laws to include the NALE provisions were enacted by the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, which received royal assent on 2 October 2019.
Subsequent to the passing of this act, the ATO issued Law Companion Ruling 2019/D3 in draft form outlining its approach to NALE, which remains unfinalised.
To date, the regulator has received many submissions in response to this draft ruling from a variety of industry bodies including the SMSF Association, which has called for increased clarity on this issue from the ATO.
The ATO will be seeking independent specialist advice from the public advice and guidance panel it set up before the ruling is finalised.
