An SMSF firm principle has reminded practitioners of the necessity to determine whether a scheme exists when assessing if a particular arrangement will trigger the non-arm’s-length income and expenditure provisions, as well as the approach required to perform this exercise.
To this end, Smarter SMSF chief executive and co-founder Aaron Dunn noted the elements needing to be recognised to perform this assessment as defined by the law.
“With respect to [section] 295-550 [of the Income Tax Assessment Act (ITAA)], the identification of a scheme, ultimately when we look at the definition, looks at any arrangement, any scheme, plan, proposal or action [or] course of action, et cetera, whether universal or not,” Dunn told delegates at the ASF Audits Technical Seminar 2024 held in Adelaide last week.
Further, Dunn took the opportunity to acknowledge the procedure practitioners will be required to take in their efforts to determine if a transaction or arrangement will trigger the non-arm’s-length income (NALI) or non-arm’s-length expenditure (NALE) provisions.
“We need to identify what [the steps are] to form part of that particular scheme and determining that what is occurring in respect to those parties who are dealing with each other and the steps in essence of that are part of that entire process as well,” he noted.
“Once we’ve determined what those steps actually are, then [we have to establish if] the fund has incurred NALE or NALI in producing what that statutory or ordinary income is or alternatively looking at the element of a fixed entitlement from income that may be [received] through a trust.”
Fellow session presenter KPMG superannuation, SMSF and retirement savings partner Liz Westover pointed out how broad the application of the ITAA rules is.
“It’s a pretty broad definition of what a scheme actually is and the other thing to actually note there too is when it is talking about the parties involved, it doesn’t mention [it has to be] a related party,” Westover said.
“You can definitely have non-arm’s-length arrangements with unrelated parties. It might [involve] mates’ rates, for example, or those sorts of things.”
