Limited NALE reprieve for one more year

The ATO will be once again extending its “no compliance action” approach in relation to NALE and expenditure of a general nature. But what does that mean in practice?

After months of lobbying, in March this year, the former Government announced their intention to amend the non-arm’s length income (NALI) and expense (NALE) provisions to ensure “they operate as intended”.  Refer to my earlier blog for a brief summary of the history of why this legislative change is needed.

Whilst the new Government has also indicated its support for the changes, industry had been seeking certainty from the ATO on how it intends to administer the NALI/NALE provisions until legislative change is enacted. This is particularly important given the ATO’s “no compliance action” approach for expenditure of a general nature, as outlined in PCG 2020/5, is due to expire on 30 June 2022.

In a welcome move, the ATO has now announced they plan to amend PCG 2020/5 to extend this “no compliance action” approach for a further 12 months until 30 June 2023. So what does that mean?

Well firstly, it doesn’t mean SMSFs have a “free pass” on NALE issues until 30 June 2023. PCG 2020/5 is very limited in its application, but it does mean that if an SMSF incurs expenditure of a general nature that has sufficient nexus to all of the income of the fund (eg bookkeeping, bank reconciliations, bank payments, liaison with the SMSF’s administrator, preparation of the fund’s financial statements and annual returns, use of accounting software etc), the ATO will not devote compliance resources to determining if the fund has NALI for the period 1 July 2018 to 30 June 2023, even if no amount is charged to the fund.

However, SMSFs still risk a NALI issue (ie all or part of the income of the fund could be taxed at 45%) where:

• A trustee provides services to their own SMSF, the services relate to particular fund assets, the services are performed in a non-trustee capacity (eg services which can only be performed by someone holding a particular licence or qualification, services which result in an improvement to fund assets) and the amount charged to the fund for those services is less than what would be expected to be charged between parties dealing at arm’s length.
• Someone other than the trustee provides services to the SMSF, the services relate to particular fund assets and the amount charged to the fund for those services is less than what would be expected to be charged between parties dealing at arm’s length. Note, discounted rates (eg for staff and relatives) are permitted provided they are consistent with the provider’s documented discount policy and normal commercial practice.
• The SMSF invests in other entities (eg companies or trusts), services are provided to the company/trust and the amount charged by the service provider is less than what would be expected in an arm’s length situation.
• The SMSF invests in other entities (eg companies or trusts), finance is provided to the company/trust on terms more favourable than what would be expected in an arm’s length situation.
• The SMSF acquires an asset for less than market value through a non-arm’s length dealing. We are still awaiting clarity on situations where funds have purchased assets from related parties partly for cash and partly in-specie.

It will certainly be an interesting few months ahead. Let’s hope industry consultation on the legislative amendments begins sooner rather than later.

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