Deductibility not a NALE criteria

NALE expenses tax deduction capital

SMSF trustees should not assume a particular expense will not be captured by the NALE rules simply because it is not tax deductible to the fund.

An SMSF specialist has confirmed the non-arm’s-length expenditure (NALE) rules can be applied to a cost incurred by the fund regardless of whether it is of a capital or income nature.

To this end, Smarter SMSF technical and education manager Tim Miller warned practitioners and trustees must not assume an expense will not trigger the NALE provisions and penalties simply because it is not tax deductible as it is capital in nature.

Miller pointed out this detail effectively means services such as the provision of documents also must be considered in the context of the NALE legislation.

“Part of the services Smarter SMSF provides is documentation [for funds]. So, for example, if [company founder] Aaron [Dunn] is providing that document service for his own self-managed superannuation fund [and makes a deed amendment of a capital nature without charging for it], there wouldn’t be a deduction for that because it is of a capital nature, but he has obviously taken a non-arm’s-length transaction [and as such the NALE rules would apply],” he explained to attendees of the SuperGuardian technical webinar he hosted last week.

“So even services like the provision of documents is going to be something we need to be making sure that we are paying for or undertaking those transactions on an arm’s-length basis.”

He acknowledged providing a deed amendment of a capital nature may not cost very much, but this was no justification for not executing it on a commercial basis.

“When we’re talking about a deed of amendment, we’re talking about something that might cost $500 to $1000. If we don’t pay for that [under the NALE rules], we’re multiplying that by two and getting [the cost] up to $2000,” he said.

“Okay [the legislation then dictates] we pay $900 in [penalty] tax, but we want to avoid that sort of transaction in its entirety.

“So we’ve just got to make sure we deal on an arm’s-length basis [at all times].”

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