The ATO has released a draft revision of Law Companion Ruling (LCR) 2021/2, which relates to non-arm’s-length expenditure (NALE), removing its previous compliance approach while adding information about the operation and application of the non-arm’s-length component rules.
The draft ruling, LCR 2021/2DC, reflects amendments to section 295-550 of the Income Tax Assessment Act 1997, made under the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, which passed parliament earlier this year.
“This draft ruling is relevant for trustees in determining the application of the non-arm’s-length expenditure provisions, taking into account the 2024 amendments, to their circumstances. To further assist trustees, the draft ruling contains additional guidance and updated examples,” the ATO stated.
“The draft ruling also confirms the removal of the compliance approaches in Appendix 1 to LCR 2021/2, given the 2024 amendments.”
The LCR added: “The 2024 amendments remove ambiguity in the application of the NALI (non-arm’s-length income) provisions by clarifying their application where a complying superannuation fund incurs a loss, outgoing or expenditure (or does not incur a loss, outgoing or expenditure) in certain circumstances.”
In releasing the LCR for comment, the regulator has tracked changes between the existing document and those it is proposing for future guidance and has added a section regarding the non-arm’s length component rules.
This is a new cap that will prevent any NALI or NALE penalties from exceeding the level of taxable income for an SMSF member and was introduced when the NALE rules become law on 1 July.
The ATO stated the draft LCR was for public comment only and represented a preliminary view of how relevant provisions may apply and comments on it would be received by the regulator until 24 January 2025.
