NALE solution may already exist


The NALE provisions regarding general expenditure may not be as severe as first thought due to details regarding these items in the ATO’s ruling.

A superannuation specialist has identified an item included in ATO Law Companion Ruling (LCR) 2021/2 that may mean general expenses classified as non-arm’s-length expenditure (NALE) incurred by an SMSF will not trigger the non-arm’s-length income (NALI) penalty provisions.

“General expenses in the ruling can be further broken down into two sub-categories. That is those that are deductible under section 8.1 of the [Income Tax Assessment] Act, which refers to expenditure that is incurred in gaining or producing assessable income, versus expenditure that is deductible under section 25.5 of the act, which deals with expenditure that is incurred in complying with or managing an SMSF’s income tax affairs,” Tax and Super Australia head of superannuation Natasha Panagis told her audience during a webinar she hosted today.

Panagis noted expenditure deductible under section 25.5 of the Income Tax Assessment Act includes items such as costs incurred for actuarial services and accountancy fees with regard to preparing the financial statements for an SMSF or lodgement of the fund’s annual return.

“According to the [ATO’s] final ruling, this type of expenditure won’t have a sufficient nexus to all of the income of the fund because that expenditure [will not have been] incurred in gaining or producing income for the fund,” she said.

“It means that the NALE provisions won’t apply even if this type of expenditure is less than what it would have been [had] the people been dealing with each other on an arm’s-length basis.

“So effectively the LCR provides an exception to the NALE provisions with these general expenses listed because they’re not deductible under [section] 8.1 [of the Income Tax Assessment Act] and rather are deductible under [section] 25.5, which has to do with complying with or managing a fund’s income tax affairs.

“It’s just something to think about there.”

Earlier this year, the ATO confirmed it would not allocate compliance resources to the enforcement of the NALE rules for the 2023 financial year.

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