The identification of any non-arm’s-length expenditure (NALE) issues an SMSF might face and the process via which they will be addressed remain the cause of great uncertainty for the sector, a technical specialist has said.
“My quandary in all of [the NALE rules] is who’s identifying [if there is a NALE situation] and at what point in time will it be put to the SMSF that there is a non-arm’s-length expense attributable to it,” SuperGuardian education manager Tim Miller said during a recent technical webinar.
Miller pointed out trustees and advisers cannot just assume this process will be automatically included in the fund’s compulsory annual audit nor that detection during the SMSF audit would mean trustees could manage the issue in a timely manner.
“From an SMSF audit point of view the SMSF auditor is going to do a certain amount, but if they are seeing fund expenses and they look reasonable for the investments held in the superannuation fund, and again they are seeing a wide variety of funds that they are auditing, [will they then feel they have to determine] what a band of acceptable expense rates [are]?” he noted.
According to Miller, defining an acceptable expense range based purely on dollar amounts would be problematic from an operational perspective.
An approach accepting a trustee sought appropriate quotes for expenditure to be incurred and agreed to a particular quoted price as being the standard vetting process for NALE is much better than having the ATO notify the fund well after the transaction that the fund and the trustees may be facing a NALE situation potentially based on prescribed pricing parameters, he said.
“So I think it’s going to be a difficult area to administer. I think in many respects that’s why the ATO is saying … if the trustees undertake their due diligence in determining what a competitive pricing structure might look like, then ultimately the non-arm’s-length provisions aren’t going to apply,” he noted.
He also stipulated the NALE rules are not triggered solely by related-party transactions.