The ATO is likely to examine SMSFs on multiple levels and use several available resources to identify whether investments in property development schemes breach the non-arm’s-length income (NALI) rules, according to senior executives from two pre-eminent industry bodies.
“I don’t think they’ll actually know there’s NALI until they look under the bonnet of an arrangement, unless something [alarming] is really obvious. [But the ATO does] have incredibly good data-mining technology, which is improving all of the time,” Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline told delegates at the ASF Audits Technical Seminar 2023 held in Adelaide last week.
“So I would think if you’re a property developer or a builder or a surveyor or whatever it is you do, and [the regulator] obviously knows what you do from your own return, and you have your own fund and your fund is earning income or otherwise from property developments and you’re reasonably well to do, then I think they well may be looking at you much more closely.
“[Also] they’d certainly be looking at the audit of the fund to see whether or not there are any issues coming through there through the ACR (audit contravention report).
“So I think their first port of call will be with the ACR, as well as marrying up what it is that you do and then going from there.”
Fellow panellist SMSF Association chief executive Peter Burgess identified the type of issues included in an ACR that could pique the regulator’s interest in funds involved with property developments.
“[The breaches in question include those regarding] the in-house assets [rule] or the sole purpose test, particularly if that’s been reported by the auditor,” Burgess said.
“You would think that [would be a] red flag for the ATO to have a closer look at the arrangements and that’s when they’ll get under the bonnet and look at the income, and if they believe the income is higher than what it would have been if the parties [had been operating] at arm’s length, well then that’s when NALI comes into play.
“And if the fund is audited by the ATO, so it’s not an ACR issue, if they find things like a breach of the in-house assets [rules], to me again that might be a red flag for them to look a bit closer at the income that has been derived under these arrangements.”
In June, the ATO issued Tax Payer Alert 2023/2 warning trustees about its focus on NALI stemming from SMSF investments in property development schemes.