An SMSF legal specialist has highlighted minor errors that can lead to breaches of the non-arm’s-length expenditure (NALE) rules when trustees pay for fund expenses via other structures or entities.
DBA Lawyers principal Dan Butler noted using a corporate trustee for an SMSF that also acted as the trustee of a family trust where the latter paid the annual registration fee was enough to trigger NALE with no way to undo the breach.
Speaking at The Tax Institute National Superannuation Conference in Sydney last week, Butler gave an example of an SMSF in this situation where the Australian Securities and Investments Commission’s (ASIC) trust registration fee for $310 for the prior financial year was paid by the family trust.
“Will this cost give rise to a contribution or NALE?” he asked attendees during his presentation.
“The ASIC fee for a special purpose company for an SMSF is only $63 and the ATO has a ruling which says if a cost is minor, irregular or infrequent, for fringe benefit tax purposes, under $300, it’s okay.
“So, is it NALE or a contribution? I can’t give you a straight answer on this. It would be a 20-page piece of advice to give you the full analysis, but that’s the way we have our law.
“Yet, a fund has an expense that’s been paid on its behalf and it’s not arm’s length. It has to be NALE, but to be conservative, and this is our advice to our clients, it is a contribution if you book it as a contribution.
“If you do not book it as a contribution, and down the track this gets picked up, then you’ve got a general NALE problem.”
He suggested advisers, auditors and trustees assess whether these types of expense payments are worth the additional costs and compliance hurdles the SMSF will face.
“Consider that $63, double it [under the two-times shortfall methodology in the NALE rules] – $126, and multiply by 45 per cent and we’re talking about $50, but it will cost thousands to rectify that mistake and you are paying general interest charges and probably shortfall penalties, and there is no de minimis,” he added.
“I have spoken with auditors who said they are definitely picking this up, pointing it out to clients and will qualify their report.”
