The level of materiality in regards to non-arm’s-length expenditure (NALE) within an SMSF still remains unclear and will become an issue for the fund’s auditors to decide, but an easy solution may already exist, according to an SMSF specialist.
SMSF Alliance principal David Busoli noted the issue of NALE had received a boost in interest with the recent closing of the consultation on the draft bill, which sets out how NALE related to general expenses will be handled within SMSFs, but the issue of what is a general expense had not been settled.
In a communication to clients, Busoli noted general expenses for an SMSF can include actuarial, accounting, audit and investment advice fees, costs related to the calculation and payment of benefits but not the benefit itself, and administration costs.
“The expenditure may be of a revenue or capital nature or deductible under a specific provision so can include fund establishment and deed amendment costs,” he said, adding any material instance must be identified by the SMSF’s auditor.
“This poses a conundrum as only those obvious instances, for example, preparing the fund accounts for $0, will be necessarily caught given that it is not the auditor’s responsibility to determine the market value of a service.”
He pointed out the difficulty in identifying a material expense would also extend to the ATO, which is why its Law Companion Ruling 2021/2 stated compliance resources for general fund expenses in an SMSF would only be directed “toward ascertaining whether the parties have made a reasonable attempt to determine an arm’s-length expenditure amount for services provided to the fund”.
Busoli noted, however, this stance by the ATO may provide a simple solution for auditors and their clients in determining whether a general expense would become a NALE issue with the regulator.
“Where the SMSF’s documentation confirms that the parties have made a ‘reasonable’ attempt to determine the expenditure, the ATO won’t try and determine whether those expenses are, in fact, arm’s-length expenses,” he said.
“Clearly silly numbers like the $0 example above will fail, but if the amount is ‘reasonable’ and documents show that both parties have made a reasonable attempt to determine that the item is at arm’s length, then the auditors will have no reason to raise the issue.”
The absence of expense figures was flagged shortly after the budget announcement that the government would revise the NALE model it planned on using and has been criticised as placing all the onus for proving an expense was reasonable on SMSF trustees and members.