What constitutes a discount given to an employee or partner of an accounting firm in relation to the administrative fee charged to an SMSF is unclear and needs further clarity, a technical specialist has said.
SuperConcepts SMSF technical support executive manager Nicholas Ali said the lack of clarity on what defines a discount could put a fund in danger of contravening the non-arm’s-length expenditure (NALE) rules contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019.
Speaking at last week’s SMSFPD Digital 2021, hosted by selfmanagedsuper, Ali said: “What is a discount that would be considered a commercial discount? Every firm has different discounts with regards to staff and most firms do offer a discount. That’s not an unreasonable situation. Does that make it not on commercial terms, however?”
He pointed out the legislation itself recognises the problematic nature of these penalty provisions.
“Even the Explanatory Memorandum acknowledges that it could be difficult to determine an exact amount that would be okay in this particular situation,” he said.
“It might fall within a range [of fees]. In some circumstances they say discount pricing may be commercial, but it’s not clear.
“So we really need some clarification on that point.”
Should an administrative fee discount of this nature be considered an instance of NALE, it would then trigger the non-arm’s-length income rules, meaning all of the income of the SMSF would be taxed at the penalty rate of 45 per cent.
According to Ali, the federal government’s process in finalising the legislation is indicative of how problematic these rules are.
“We have the moratorium until the end of next financial year, but you can see it’s been pushed out from 2018/19 to 2019/20 to 2020/21 to now 2021/22, and I think part of the reason is because it’s so confusing,” he said.
“It’s nonsensical because it’s gone beyond what it actually was supposed to do.”