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AAT, ATO, Compliance, NALI/NALE, SMSF

CAANZ calls for NALI clarity

NALI AAT ATO BPFN and Commissioner

The ATO should update its guidance regarding the application of the non-arm’s length income rules after one of its rulings was overturned by the AAT last year.

The ATO should update its guidance regarding the application of the non-arm’s length income (NALI)  provisions after an Administrative Appeals Tribunal (AAT) decision confirming interest derived from lending arrangements with interposed entities breached these rules was overturned, according to Chartered Accountants Australia and New Zealand (CAANZ).

CAANZ made the call in a submission on the ATO’s Decision Impact Statement (DIS) released after the outcome of the BPFN and Commissioner of Taxation [2023] case heard by the AAT in August last year.

The accounting body noted the AAT’s reversal of the original ATO decision means further details should be provided to SMSF practitioners and trustees as to how the regulator will treat income earned in similar situations.

“We believe this decision provides the ATO with the opportunity to take a more pragmatic and commercial approach regarding the matters considered by the commissioner when forming the opinion that income is not non arms-length income. We encourage the ATO to take this opportunity,” CAANZ financial advice leader Michael Davidson said.

“As a result of the decision, we also recommend that the ATO considers what changes are required to guidance material relating to NALI to reflect the decision and this be noted in the ‘implications for impacted advice or guidance’ section of the DIS.

“In particular, Taxation Ruling (TR) 2006/7 needs to be updated to reflect the ATO’s approach to the matters it may consider relevant when forming the opinion that income is not NALI in light of the AAT decision.”

Additionally, CAAANZ encouraged the regulator to provide examples of documentation which could be collected and furnished by trustees to prove a fund had acted on commercial terms and not breached the NALI rules.

“Importantly, additional guidance would be beneficial to SMSF trustees and their professional advisers regarding the documentation or other substantiating records that would be required to satisfy the ATO that any arrangements entered into were on a commercial basis and that the income derived was no greater than what would have been derived if the parties involved were dealing with each other at arm’s length,” Davidson noted in the submission.

“Examples of the records that could be retained by trustees could include loan documentation; trustee resolutions; and statements of professional advice, such as legal or accounting advice.

“Beyond the impact of the AAT decision, additional guidance will be required once the non-arms-length expenditure changes contained in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 become law.

“It would be of great assistance to SMSF trustees and their professional advisers as they navigate these changes if this guidance was also incorporated into the guidance and TR2006/7 update referred to above,” he concluded.

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