The ATO is expected to release guidance this month regarding its approach to calculating the amount of statutory income in an SMSF that will be considered non-arm’s length income (NALI) in relation to a capital gain resulting from non-arm’s-length dealings, according to a technical specialist.
Smarter SMSF technical and education manager Tim Miller said indications the ATO would release the guidance have appeared over the past week and should provide clarity on what is normal income of a fund, its statutory income, which incorporates the capital gains tax, and the application of the NALI provisions to the latter.
“What the ATO will be saying with this guideline that is supposedly coming out in June is they will clarify these interactions when dealing with capital gains where there is a non-arm’s-length dealing related specifically to that investment,” Miller said in an online briefing yesterday.
“This was one of the issues that was raised in Law Companion Ruling (LCR) 2021/2 where if an expense is capital in nature, so it relates to the acquisition of an asset, has an impact on the final capital gain, which would be carried through the entirety of the investment, and for limited recourse borrowing arrangements (LRBA), this was a big issue.
“This determination, in theory, is going to help us address that from a pure calculation point of view to ensure that there’s consistency between the various provisions of the Income Tax Act.
“We still have to wait and see, but it is interesting to see this one come out now in light of the fact that we’re about to hit a period in time where the ATO is going to be more vigilant with regards to NALI and expenses inside of SMSFs.”
Smarter SMSF chief executive Aaron Dunn said the guidance goes back to the “genesis” of the NALI issue and the issuing of zero interest loans for related-party LRBAs.
“We saw those take off, but then saw the adjustment that needed to be done by the end of January 2017 to ensure they complied with the safe harbour rules.
“Then the LCR came out and said any arrangement that’s been entered into that was done on non-commercial terms was permanently tainted, but the ATO backpedalled and it had amended Practical Compliance Guideline 2016/5 and if you complied by the end of January 2017, it was not going to taint the fund with NALI at that point.
“We’re going to see those sort of elements get tidied up and give us a lot of clarity as we move forward in respect to those NALI requirements.”