The ATO has confirmed non-arm’s-length expenditure (NALE) that arises in relation to a specific asset after its acquisition will not permanently taint it and thus have no impact on any subsequent capital gain from it, an SMSF legal firm has noted.
DBA Lawyers lawyer Fraser Stead said the ATO had outlined this position in its revised draft guidance on the operation of the NALE rules, Law Companion Ruling (LCR) 2021/2DC, which remains open for comment until 24 January.
Speaking during a briefing late last year, Stead noted the guidance was given in the form of an example regarding the treatment of dealings on a non-arm’s-length basis, specifically where an SMSF trustee carries out duties in an individual capacity.
“Paragraphs 72 to 75 of the LCR present Sharon as a licensed real estate agent and the director of Ringo Real Estate who provides property management services to the SMSF as a licensed real estate agent,” he said.
“She utilises the equipment and assets, including the business’s website, in performing these services and charges the SMSF 50 per cent of the price for her services.
“What would that be taxed as non-arm’s-length income (NALI) here? Is it the net rent each year but not the capital gain on sale, or both the net rent and the capital gain? It is, in fact, actually the net rent each year, but not the capital gain.”
He noted this would seem to be incorrect given property management services were provided to the SMSF, but pointed to the additions to the LCR in which the ATO stated the capital gain would not be affected.
“The LCR states the NALE incurred by the SMSF in acquiring the property management services is a specific expense, which can taint permanently or temporarily, and there is a sufficient nexus between the NALE and the rental income which will therefore be NALI for each income year the non-arm’s-length dealing remains in place,” he added.
“However, changes made to paragraph 75 state that due to the nature of the NALE there will not be a sufficient nexus between it and an amount of statutory income determined by reference to any capital gain.
“This is interesting because while the property management services are a specific expense, it is not enough to make a connection to the statutory income.
“So the ATO has broadly confirmed here that post-acquisition-specific NALE on revenue should not permanently taint the capital gain.”
