Outcomes impact on NALE unclear

NALE result

It remains unclear how the end result of a transaction will determine how the non-arm’s-length expenditure rules will be applied.

The SMSF sector is still unclear about how the end result of a transaction involving a super fund will impact the application of the non-arm’s-length expenditure (NALE) rules, the partner of a large accounting firm has said.

“A lot of these examples [in Law Companion Ruling (LCR) 2021/2] talk about the upfront expenditure, but there are not a lot that talk about what happens on the back end [or result] around it,” Deloitte superannuation, SMSF and retirement savings partner Liz Westover told delegates at the Chartered Accountants Australia and New Zealand National SMSF & Financial Advice Conference 2022 held in Sydney recently.

“So if the income received or the proceeds you received is actually less than what you would have received if [the transaction had been executed] on an arm’s-length basis, again I would argue you [would be] in the [NALE] regime, but there isn’t anything in [LCR 2021/2] that actually talks about that.

“So there’s probably some more work that needs to be done in relation to those [situations].”

Westover pointed out the situation has been exacerbated by the ATO’s stance of not allocating compliance resources to enforce the NALE rules as the approach has not given the industry any indication as to how the rules will be eventually policed.

She did acknowledge the appendix to LCR 2021/2 may have given some insight into the regulator’s attitude toward transactions caught by the NALE rules.

“What [the appendix] is saying is the compliance approach of the tax office at the moment, if they were looking at these provisions and whether or not they’ve been applied, is basically if a reasonable attempt has been made to determine what [the arm’s-length expenditure amount is], then they’re not going to look any further,” she noted.

“So you have to document the reasonable basis on which you have determined [the amount] you have charged [for the troublesome transaction].”

However, she said this set of circumstances will place more pressure on practitioners for the time being.

“We are the professionals and our clients will be turning to us to sit down, consider all of those factors and reach a determination ourselves,” she said.

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