NALE detection could be difficult

NALE identification

The identification of NALE situations may not be straightforward, regardless of examples provided in Law Companion Ruling (LCR) 2021/2.

A specialist lawyer has highlighted the potential challenges facing auditors and trustees in identifying instances where non-arm’s-length expenditure (NALE) could be an issue for an SMSF as detailed in the examples provided in Law Companion Ruling (LCR) 2021/2.

DBA Lawyers director Daniel Butler made specific reference to Example 9 contained in LCR 2021/2, detailing a situation where a plumber by trade, named Trang, renovates a bathroom and kitchen of a property held in her own SMSF, to demonstrate his point.

In the example, the trustee’s circumstances trigger the NALE rules because the renovations to the property are performed within business hours using the plumber’s tools of the trade, involved the assistance of an apprentice and the SMSF was not charged a fee for the work.

During a panel session at the Chartered Accountants Australia and New Zealand SMSF Conference 2021 held last week, Butler alerted delegates to the difficulties of detecting a compliance breach in this scenario if an invoice for the services performed is never issued to the super fund.

“How is the auditor going to find [this instance of NALE]? There’s no plumbing expense going through the accounts so [the auditor would then] have to cross-examine Trang,” he noted.

“[The question would have to be asked:] ‘Trang, what did you do through the year? Tell us what you were doing on the weekends or after hours. Were you leading a normal life or were you doing up the rental property that’s owned by your self-managed fund? We want to know.’”

According to Butler, the situation may be more serious and common as tradespeople like Trang would probably not think it was anything out of the ordinary.

As such, he suggested the rules defined by LCR 2021/2 require a review as they are impractical and have moved too far away from their original goals – to eliminate limited recourse borrowing arrangements with repayment terms that are too favourable for the SMSF.

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