Error in NALE consultation paper

The consultation paper issued recently regarding non-arm’s-length expenditure contains a fundamental flaw in one of the examples it provides.

A technical specialist has identified a error in the government consultation paper recently issued proposing a solution to the non-arm’s-length expenditure (NALE) rules pertaining to general expenses incurred by SMSFs.

Accurium head of education Mark Ellem drew practitioners’ attention to Example 2 in the reference material, which demonstrates a situation where the new NALE rules for general expenses would not apply.

The example outlines a situation where an SMSF trustee called Pippa owns a business property worth $1 million and sells it to her fund for $200,000. The SMSF then leases the property to an unrelated third party, an arrangement that generates $50,000 of income for the 2021 financial year. As the property has been acquired effectively at an $800,000 discount, the transaction would trigger the NALE rules covering a specific asset.

“Where are we going to have a fund that actually buys a $1 million property for $200,000 because while that’s given rise to tax consequences, there is a more concerning issue for Pippa here,” Ellem told attendees at a recent Accurium technical webinar.

“That more concerning issue is she hasn’t complied with the exception to the prohibition of acquiring an asset from a related-party rule.”

He pointed out Pippa’s non-compliance is not related to the sale and purchase of the real estate asset itself as it is business real property and an SMSF is allowed to acquire this type of item from a related party.

“Yes it’s business real property, that’s an exception, but the exception requires the business real property to be acquired at market value,” he noted.

“But it hasn’t been. It’s been acquired at $200,000.

“So the exception hasn’t been applied and what’s the penalty for a breach of section 66 [of the Superannuation Industry (Supervision) Act]? One year’s room and board at His Majesty’s hotel [or one year’s imprisonment].

“I don’t think that’s going to be a scenario we come across on a daily basis [because] we’re going to ensure that our client is acquiring that business real property at market value with the relevant supporting documentation.”

Assistant Treasurer and Financial Services Minister Stephen Jones released the NALE consultation paper in January.

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