The SMSF Association has welcomed some of the recently announced ATO rulings regarding the non-arm’s length income (NALI) rules contained in Law Companion Ruling (LCR) 2021/2 but noted other elements of the instrument have not provided the required clarity the industry needs.
Firstly the peak industry body applauded the updated position on NALI regarding the matter of trustees performing services on behalf of their SMSF.
“It is pleasing to see the ATO clarify that the non-arm’s length income provisions will not apply in situations where an SMSF trustee has provided a service to their own fund but is unable to charge their fund a fee without breaching the Superannuation Industry (Supervision) Act 1997,” SMSF Association chief executive Peter Burgess acknowledged.
He also endorsed the LCR 2021/2 ruling confirming the NALI provisions would not apply to situations where services are provided to the tax affairs of SMSFs that fell within section 25-5 of the Income Tax Assessment Act 1997.
“This further clarification is welcomed, however given how commonly these services arise, we think it warranted more than a brief footnote and passing reference in the examples,” he said.
Further he approved of the decision to use a more commercial-based attitude toward discount policies and employee share schemes but pointed out the guidance was still lacking in some detail.
“Without practical examples – especially for small businesses where SMSF trustees often wear multiple hats and inevitably influence discount policies, this guidance will be difficult to apply in practice,” he noted.
However, Burgess expressed reservations over the valuation of trustee services for their SMSF regarding LCR 2021/2.
“Valuations remain one of the most pressing issues. While the ATO’s existing guidelines are a useful tool for determining the value of fixed assets such as property, they provide little assistance when it comes to valuing services.
“Furthermore, the rulings fail to clarify whether using a market value within an acceptable range is sufficient, instead appearing to require trustees to justify a single value point – a rigid approach that risks leaving them exposed when common sense flexibility is needed.”
He also highlighted one area of requested change the LCR 2021/2 continues to ignore.
“It is difficult to comprehend that a minor undercharging of a capital expense, such as replacing a single vanity in a property owned by an SMSF on non-arm’s terms, could result in the entire capital gain on that property being taxed as NALI when it was eventually sold,” he explained.
“We think the ruling was a missed opportunity for the ATO to consider safe harbour or de minimis thresholds to avoid small and often inadvertent oversights that may permanently expose all income and capital gains from an asset to the punitive 45 per cent tax rate.
“This rigid approach is disproportionate and risks punishing trustees for minor errors with life-long tax consequences.”
Burgess confirmed the industry body would continue to work with the ATO to deliver more clear and practical guidelines for trustees.
