The revisions to Law Companion Ruling (LCR) 2021/2 have broadened the circumstances by which discounts offered for SMSF administrative services to employees can escape being caught by the non-arm’s-length expenditure (NALE) provisions.
Prior to the most recent amendments to LCR 2021/2, discounts for administrative services offered to individuals working for the firm providing the work had to apply to all employees or class of employees in order to be exempt from triggering the NALE rules.
“With regard to discounts, the language has been tightened, [now bringing into relevance] a focus on whether [the policy] is consistent with normal commercial practices. So now the overarching requirement is not just that the discount is offered to all different classes of employees or the different classes of employees, but [more broadly] that you can show it is consistent with commercial practices,” Accurium head of SMSF education Mark Ellem told attendees of a technical webinar hosted recently.
Ellem pointed out the concept of commercial practice consistency also extended to other cost treatment arrangements that previously could have invoked the NALE rules.
“[LCR 2021/2] also reaffirms a cost recovery basis will generally not be consistent with an arm’s-length dealing unless it is part of a normal commercial-backed substantiated discount policy,” he explained.
However, he emphasised circumstances where a trustee is able to influence a discount policy will still deem that arrangement as not being performed on an arm’s-length basis.
“So if you’ve got a partner [of an accounting firm] saying: ‘Okay all the fees for [administering] the partners’ funds [will receive a] 100 per cent discount and managers will get a 50 per cent discount, and all of the other staff will get a 10 [per cent discount],’ particularly if the partner who has influenced that might be the managing partner of the firm, then that’s an indication the arrangement is not [carried out] at arm’s length,” he said.
