The ATO’s approach to penalising non-arm’s-length income (NALI) breaches seems to diverge from the discretionary stance it has typically taken towards ensuring SMSFs meet their compliance requirements as there is still no mechanism for fixing an issue, according to a superannuation lawyer.
DBA Lawyers senior associate William Fettes noted once a trustee breaches the NALI rules, it is impossible for the fund to rectify the issue without facing penalties, even if the infringement was accidental.
“There’s no ATO discretion to allow for SMSF trustees to rectify honest or inadvertent mistakes. It doesn’t matter how marginal the advantage of [the amount in question is], you can potentially have these pretty catastrophic outcomes by way of tax,” Fettes said during a briefing last Friday.
“In a compliance context for SMSFs, the ATO has a model, which is great. Generally, the compliance model is if you make the regulator’s job easier by coming forward and disclosing everything, they will go easier on you.
“If you’re a reluctant super fund in terms of complying with your regulatory obligations, they’ll throw the book at you.
“There’s no real [rectification mechanism] like that for NALI, which I think is problematic.”
He expressed concern that rather than deterring funds from triggering NALI, this approach might discourage those who have made accidental and honest mistakes from disclosing a breach, undermining the intended purpose of any rules to stamp out deliberate NALI infringements.
“It would be good from a policy perspective if there was a way to not necessarily let funds off the hook for things that have gone wrong, but to encourage engagement and better behaviour,” he said.
“Most funds are meant to self-assess where you submit your statutory annual return and you’re meant to declare NALI, and you can bet that funds do not disclose NALI routinely, perhaps even when many ought to be doing so.
“We have a problem where there’s no mechanism to rectify and I don’t know that we’re really ever going to come to grips with that. It’s only the big stick of penalties that incentivises people to disclose and declare NALI in their statutory annual returns.”
