New legislation to implement the non-arm’s-length expenditure (NALE) rules is of limited significance as it lacks clarity over their application and they are unlikely to be examined critically, an SMSF specialist has noted.
SMSF Alliance principal David Busoli noted the commencement of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2023 on 1 July introduced a penalty regime that is not onerous, but unclear as to when it applies.
“[The rules] limit the amount of non-arm’s-length income (NALI) arising from a non-arm’s-length [general expenses] transaction to twice the difference between the actual expense and the expected market rate of the expense,” Busoli said.
He noted in the case of a related-party accountant charging their SMSF accounting fees of $1000 instead of the market rate of $2000, the amount of NALI would be charged at 2 x ($2000 – $1000), that is, $2000, accounting for the difference between the actual and market rate of the expenses, which is then taxed at 45 per cent for a total NALI penalty of $900.
Given these figures and assumptions regarding market rates, he questioned how significant the application of NALI will be.
“Clearly, where no charge has been raised there is an issue, but if one has [an issue], who is to say what constitutes market value,” he said.
“It is problematic as to whether it will be reported as the ATO is not going to investigate situations where a reasonable attempt has been made to apply an arm’s-length amount, or a broad staff discount has been applied, or the trustee has provided the service in their capacity as trustee only.
“Importantly, this is not a Superannuation Industry (Supervision) [Act] compliance area so is not something the auditors are required to check.”
Busoli has previously been critical of the lack of clarity around determining materiality in relation to general NALE transactions within an SMSF.
He noted even the ATO had a problem in determining materiality, which is why it would only direct compliance resources toward checking whether a reasonable attempt had been made to determine an arm’s-length expenditure amount for services provided to an SMSF.
“The far more serious application of NALI is the permanent tainting of an asset, generally real estate, where the net income and eventual taxable capital gain is hit with 45 per cent tax. Incredibly this provision was not even considered,” he said.
