Ruling shows NALE application

NALE SMSF trustee capacity non-arm's length expenditure

The ATO has indicated financial services professionals who act on behalf of their own fund must do so in a trustee capacity only to avoid being hit with NALE taxes.

The ATO has affirmed the view a financial services professional can use their skills and experience to manage the affairs of their own SMSF when done in their capacity as a trustee and this would not be considered as non-arm’s-length expenditure (NALE) under specific circumstances.

In a private binding ruling (PBR) handed down in mid-August, but released on 3 October, the ATO considered the case of a former corporate accountant who prepared and lodged the annual return as a director of the corporate trustee of an SMSF and ruled the accounting services provided were not NALE.

In making its decision, the regulator noted the director, which it referred to as the trustee, was still a registered tax agent and prepared the annual accounts and lodged the annual return due to their knowledge, skills and qualifications, and did not charge the fund for this work.

Additionally, the SMSF had documented the trustee’s work for the fund was carried out in their capacity as trustee and this was reconfirmed every year, with the fund’s auditor confirming they were also satisfied with the nature of those arrangements.

The ATO also noted the trustee had worked as a corporate accountant and was licensed as a tax agent so they could be an authorised contact person with the ATO for their employers.

In ruling the trustee’s work was not NALE, the ATO pointed to Law Companion Ruling 2021/2, which states that since trustees were prevented from receiving remuneration, the NALE provisions under section 295-550 of the Income Tax Assessment Act (ITAA) 1997 were not applicable.

“The non-arm’s-length expenditure provision will not apply where a trustee, acting in that capacity, performs bookkeeping or accounting services for the fund for no remuneration,” the PBR said.

However, the ATO also noted the trustee had used their tax agent software to lodge the return.

“You have stated that it has always been the trustee’s intention to prepare and lodge the annual returns due to his professional skills, and the only reason the fund uses the trustee’s tax agent number is due to the software requirement and for the cost and time efficiencies,” it said.

While it stated in the PBR “these are factors that may indicate that the trustee is performing these duties in his individual capacity as a tax agent”, it added minor, infrequent or irregular use of equipment or assets did not, by itself, show the trustee was acting in their individual capacity.

“Based on the information provided, it is reasonable to conclude that the trustee is using his professional experience to provide services and duties in his capacity as trustee and that any use of his equipment is minor and irregular,” it said.

“Therefore, it has been determined that the accounting services provided by the trustee does not result in non-arms-length expenses under paragraphs 295-550(1)(b) and (c) of the ITAA 1997.”

In publishing the PBR, the ATO said it was not binding on other parties and nor should it be applied to other circumstances.

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