The current approach by the ATO in applying the non-arm’s-length expenditure (NALE) provisions to SMSFs indicates it will be targeting the activity of mum and dad SMSFs even where the expenses may only run to a few hundred dollars, according to an SMSF legal expert.
DBA Lawyers principal Daniel Butler said while the ATO will not be taking any enforcement action around NALE related to general expenses until after the 2022 financial year, its ongoing focus on specific expenses would impact SMSFs of all types, including those that generate very small expenses for their fund.
“The ATO is not going to press the view that a $100 accounting discount by the member or trustee of that fund will render it subject to NALE for the four financial years from 2019 to 2022,” Butler said during a recent webinar by the legal firm.
“This approach does not apply to where even a low expense relates to a particular type of income, so, for instance, where there are low interest loans for investment property, the net rental income and capital gain will be exposed to NALE.”
He said SMSF advice practitioners need to be aware of what their clients were doing and whether those activities created a NALE risk as the “ATO looks like they have in sight mum and dad super funds”.
“The average balance of these funds is $1.3 million, and even if there is a $100 discount, the ATO is stating that, because of those small discounts, it will tax everything as NALE along with every asset held at the time. This is their current view and they will be after mum and dad funds,” he noted.
“In the past, NALE cases or decisions have been about very flagrant activity where lots of money was involved and they were chasing schemes, but we have a change in the ATO’s attitude.
“They are after mum and dad funds, which is really scary, and making them feel really scared. They feel they can’t do anything, not even paint the picket fence to their property. Indeed, you can paint the picket fence to your property, you just can’t pay for the paint from the super fund.
“The ATO’s view of NALE is very excessive and in its current thinking almost everything is NALE until you prove otherwise when there is a related-party dealing.
“We do hope the ATO sees sense and looks at a practical construction of legislation which is not just theoretically based, but is a generous reading of the legislation in favour of the revenue.”
