ATO looking deeper into NALE issues


The ATO’s final ruling on NALE is being reinforced by investigative work into how the SMSF sector has been using non-arm’s-length arrangements.

The ATO now has the authority to move against instances of non-arm’s-length expenditure (NALE) and is using its data-mining capabilities to find evidence of breaches, two legal experts have claimed.

Cooper Grace Ward partner Clinton Jackson said the release of the ATO’s finalised position on how it will deal with NALE inside an SMSF, outlined in Law Companion Ruling (LCR) 2021/2, completed a process of targeting NALE that began in 2018 with LCR 2018/D10.

“Non-arm’s-length income (NALI) rules began in 2007 as special income rules and with the rewrite of the tax act they were replaced with section 295.550,” Jackson said during a webinar today.

“On 1 July 2018, there was the addition of NALE rules and the question is whether those changes were necessary or whether the ATO had the power to enforce NALI rules where there was no expense that was at market value.

“The benefit of the 2018 amendments is the ATO has a very clear mandate now to attack people where expenses are not incurred in accordance with an arm’s-length dealing.”

Cooper Grace Ward senior associate Steven Jell said while the process to reach LCR 2021/2 had taken three years, and the ATO had committed to not using its compliance resources in regards to non-arm’s-length arrangements during that period, it has been researching what potential issues might arise.

“While the ATO has said it will not use compliance resources to investigate things that are occurring, they are data mining and fact-finding and raising these issues in other situations,” Jell said during the webinar.

“The ATO is still asking questions and what we need to think about is what are they doing with this information, what data are they collecting, how are they analysing it and what are they going to use it for and what other questions will they ask in regards to these NALE rules.”

Jackson said this type of investigative work had been going on for some time and appeared to be digging into a range of issues.

“What we have seen over the past few years is that when the ATO is asking those questions for super funds, they are using those as pressure points as part of other group audits,” he said.

“If they are not liking things that are being done, they are throwing super issues on the table, even if they would not normally take those issues up, just to have some more scope to argue with parties in negotiations.

“We have seen a number of questionnaires over the last few years where the ATO is asking questions particularly around unit trusts and loans and how those dealings have occurred and many of those questions have been focused on this expense issue.”

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