NALE enforcement not ironclad

NALE enforcement

The ATO’s stated position with regard to enforcement of the NALE rules for the 2022 income year in PCG 2020/5 is not ironclad.

The partner of a top international accounting firm has indicated the ATO’s compliance stance on non-arm’s-length expenditure (NALE) as stated in Practice Compliance Guidance (PCG) 2020/5 does not mean SMSFs are completely immune from the enforcement of penalties for breaches of these rules.

The ATO had confirmed through PCG 2020/5 it will not be allocating any enforcement resources to policing compliance with the NALE rules for the 2022 financial year.

“I’m not sure the PCG gives me 100 per cent comfort around ATO activity [regarding NALE]. Maybe they’re not going to come looking for an issue, but should they be looking at my fund for other reasons and find it, there are no guarantees that they won’t take action on it,” Deloitte superannuation, SMSF and retirement savings partner Liz Westover noted during a question and answer session at the recent Chartered Accountants Australia and New Zealand SMSF Conference 2021.

“So if you’re talking about mitigating risks, the PCG certainly helps but I wouldn’t say it’s 100 per cent ironclad in all circumstances.”

The appendices of Law Companion Ruling 2021/2, which addressed non-arm’s-length income in relation to NALE, also contain aspects of the regulator’s compliance stance, but DBA Lawyers director Daniel Butler pointed out this cannot be seen as a written compliance exemption either.

“It is in the appendix, but the appendix is [about] the general expense benchmarking that comes in from mid-2022 to supersede the PCG [and not the exemption],” Butler noted.

“[Also] the appendix is not a formal part of the ruling so you’ve got to be careful because a ruling often has explanations or examples and they don’t often find themselves under the binding part of that ruling.”

Both Westover and Butler were in agreement that the only way trustees could ensure they would not  fall foul of the NALE rules if they provide a service to their SMSF that could be considered to be done in a professional capacity is to charge the fund a fee for that service.

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