Small errors previously managed in a practical manner could now be caught by the non-arm’s-length expenditure (NALE) rules enacted by the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019, an SMSF specialist has said.
According to SuperGuardian education manager Tim Miller, one such practice that could fall foul of the new rules is dealing with a situation where a trustee has paid an expense on behalf of an SMSF.
Traditionally, situations like this have seen the expense treated as a contribution in an effort to implement the most expedient method of rectifying the error, Miller said.
“That’s what we all have done for the last forever years. Forever we have treated those expenses as a contribution,” he told attendees at the SuperGuardian strategy workshop in Sydney last week.
However, the NALE rules mean the ATO can now deem the SMSF in question has incurred an expense that has been charged at a cheaper-than-commercial rate because it was paid by a trustee of the fund, he pointed out.
“If we pay an expense and treat it as a contribution, we are effectively increasing the capital of the superannuation fund,” he noted.
“So unless we have a contract in place that [addresses a trustee] personally paying the expenses [of the fund], and treating every one of those personal expenses as a contribution, we risk tarnishing our self-managed super funds with non-arm’s-length expenses.”
He pointed out the financial severity of having these situations being caught by the NALE rules depends on the degree to which a nexus can be established to the income of the fund.
“When there is a general nexus to all of the income of the fund based on the expenditure of the fund, it can tarnish every bit of income that that self-managed super fund earns,” he said.
The ATO recently extended its NALE compliance amnesty for a further 12 months while it continues to formulate its final position on the issue.