Compliance, NALI/NALE, SMSF

Lack of discount policy a NALE risk

SMSF NALI Discount policy PCG 2020/5 LCR 2021/2

Professional service firms offering discounted SMSF services to their employees may face NALI repercussions at the end of the financial year if specific conditions are not fulfilled.

A poll conducted among SMSF practitioners has revealed a provision within the non-arm’s-length expenditure (NALE) regime that has applied from the start of the current financial year may cause compliance issues for firms that offer discounted SMSF services to their employees.

The survey, conducted during a webinar held by DBA Lawyers last Friday, showed 40 per cent of those watching the presentation worked for firms that currently offered discounts to their employees when performing services for their funds.

Specifically, 78 per cent of those who worked within practices providing discounted SMSF services responded their firms did not currently have a written discount policy in place, with DBA Lawyers special counsel Bryce Figot noting this may give rise to NALE as stipulated in ATO Law Companion Ruling 2021/2 which covers the application of the non-arm’s-length income (NALI) rules.

“If you work at a firm that gives discounts to [employees’] SMSFs and you don’t have that written discount policy, and even if you do have the written discount policy, if it’s not the same discount being provided to all employees, partners, shareholders or officeholders pursuant to that policy, they’ve got NALI,” Figot said.

“This is a big deal, because although the law has applied since 1 July 2018, on its face this is the first financial year that this law actually has applied in a practical sense. So you haven’t had to worry about this previously.”

He noted those businesses without a written discount policy were previously spared from incurring a NALI liability due to the provisions of Practical Compliance Guideline (PCG) 2020/5, in which the ATO outlined it would not commit compliance resources to determine whether an SMSF had NALI during the 2018 to 2022 financial years.

“There is a practical compliance guideline that used to provide an out. The out only applied in respect of expenditure incurred on or before 30 June 2023. [However], from this financial year and onwards, this PCG does not apply,” he said.

He advised firms caught in this position to rectify the situation as soon as possible before the end of the financial year to avoid a potential NALI liability.

“Discounts won’t cause NALI where they are consistent with normal commercial practices, such as an individual acting in their capacity as a trustee or a director of a corporate trustee being entitled to a discount under a discount policy where the same discounts are provided to all employees or partners or shareholders or officeholders,” he noted.

“What you must have now [is] a written formal discount policy and one that you could dish up to the ATO. If your firm provides discounted services to key people’s SMSFs, ensure that you have your discounted policy documented that factually you are implementing the policy as written.”

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