The ATO has clarified how non-arm’s-length expenditure (NALE) that occurs in one income year but has ceased in a later income year should be viewed in terms of non arm’s-length income (NALI) by removing confusing terminology from its revised draft guidance.
DBA Lawyers lawyer Fraser Stead said the ATO had removed references to a ‘recurrent expense’ in the revised draft guidance on the operation of the NALE rules, Law Companion Ruling 2021/2DC, as it was no longer necessary going forwards.
“This deletion of the word ‘recurrent’ makes sense in the fact that if you have a general expense, say your accounting fees, where you’ve incurred NALE, and that was happening yearly, then the year you get rid of that expense, the next year you’re not going to have general NALE,” Stead said during a webinar late last year.
“The word wasn’t adding anything to the explanation in the paragraph and the ruling, given we now we have general and specific NALE clearly defined.
“It might seem we’re actually losing some guidance on how you would define a certain expense, but in reality this adds more clarity by removing a word that we didn’t really need for determining what an expense is.
“If you’re looking at whether you’ve incurred that expense in an income year in terms of general NALE, it doesn’t really matter if it’s recurrent because if it’s general NALE and you don’t have it subsequently, then you’re not going to have NALE in the later income year.
“It’s important to keep focused on all these different factors. For instance, you can have acquisition and post-acquisition NALE or specific NALE in relation to ordinary income or in relation to statutory income.
“Sometimes all of these things will be interrelated and you might have one action done by the trustee or one expenditure incurred that fits a lot of these different criteria that we’ve identified here.
“You have to be careful when you’re looking at this as not everything is going to neatly fit into one category and it’s important to just keep your eye on the ball.”
