The ATO has flagged the structures used by SMSFs it is actively examining for potential breaches of the non-arm’s-length income (NALI) rules, noting breaches are more likely to occur where complex arrangements are involved.
ATO SMSF director Kellie Grant said the regulator, as part of its compliance program for the current financial year, was reviewing schemes that involve multiple entities within a private group or multiple groups, the movement of income streams into SMSFs through related entities owned by the same fund and complex non-recourse lending arrangements or guarantees to place assets in an SMSF.
“In our compliance work we are seeing NALI in arrangements involving trust interests and issues arising from a distribution from a fixed or hybrid trust triggered by below market acquisition, a disproportionate distribution or a discretionary distribution,” Grant told attendees of a presentation hosted by The Auditors Institute towards the end of last year.
“We are also seeing NALI triggered where there are distributions from discretionary and hybrid trusts because there is no fixed entitlement and from dividends paid directly or indirectly by a private company.”
She also noted the ATO was still seeing instances of NALI related to property and construction within SMSFs.
“Property development in associated joint venture structures the SMSF directly or indirectly invests in may result in substantial profits for the fund, especially if related group entities provide most of the services without adhering to arm’s-length market values,” she indicated.
“That results in profits disproportionately attributed to the SMSF compared to the capital the SMSF contributes.
“It is so important that all dealings in relation to fund assets are carried out on arm’s-length terms since any non-arm’s-length acquisition is going to mean any ordinary income generated by that asset, and any statutory income generated on the disposal of that asset, will be forever tainted as NALI.
“That will also be the case even if the asset is acquired with finance that is not on arm’s-length terms, but is then refinanced on an arm’s-length rate.”
