Advisers and trustees should not fall into the trap of assuming the non-arm’s-length expenditure (NALE) rules are applicable exclusively to related-party transactions, a technical specialist has said.
“I think what’s important with reference to the whole concept of arm’s-length transactions is that we naturally as an industry contemplate the idea that we’re only talking about related-party transactions,” SuperGuardian education manager Tim Miller told attendees at a recent technical webinar.
“But the EM (explanatory memorandum) [to Law Companion Ruling (LCR) 2021/2] is quite explicit in its commentary, highlighting that the parties don’t need to be related to be able to transact on a non-arm’s-length basis.
“So if there’s any sort of ‘you scratch my back, I’ll scratch yours’ arrangement in place with property developments and the other [situations], maybe not necessarily the SMSF but other parties associated with the SMSF, then potentially there is going to be non-arm’s-length ramifications.”
With regard to LCR 2021/2, Miller acknowledged some of the examples the ATO has provided in the ruling were perhaps too simplistic and that real-life transactions and circumstances are likely to be more ambiguous.
“The ruling does provide a couple of examples as to how [the NALE rules] work [that] we need to be mindful of, but if you look at the first example, where the property is valued at $800,000 and then [the trustees] acquire it for $200,000 – no one is doing that,” he said.
“And if they are doing that, then they deserve to have that [transaction] treated as non-arm’s-length expenditure and I think that’s something we need to be mindful of there.”
During the same presentation, he warned advisers that the nature of the NALE rules meant service provider relationships traditionally considered as conventional may now require greater scrutiny to avoid the severe penalties associated with the provisions.