ATO needs to clarify NALE rules

The SMSF Association has called on the Australian Taxation Office (ATO) to clarify its rules on non-arm’s length expenses (NALE) in its final ruling as the rules are complex. 

During its National Conference, the SMSF Association’s deputy chief executive/ director of policy and education, Peter Burgess, said the new rules issued in draft Law Companion Ruling in 2019 about NALE applied in situations where the parties did not deal with each other at arm’s length and the trustees incurred an expense that is not on arm’s length terms. 

He said the key issues were: 

• More examples to illustrate the difference between a service provided by a self-managed superannuation fund (SMSF) trustee in their capacity as a trustee and services provided in their capacity as an individual. In particular, if an SMSF member is qualified and licensed to provide a particular service to the public, will the new NALE rules automatically apply if they provide that service to their fund and don’t charge their fund an arm’s length fee? Or will it depend on the use of business assets and, if so, will there be a materiality test so that incidental use of business assets won’t invoke the new rules?  
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• If an SMSF acquires an asset and doesn’t incur arm’s length expenditure, does that mean the asset is forever tainted and any capital gains realised when the asset is sold will be taxed as non-arm’s length income even though the fund may have incurred arm’s length expenditure in relation to the asset in all subsequent years? And how will the rules apply to reoccurring expenditure that doesn’t relate to the acquisition of an asset if the fund incurs non-arm’s length expenditure in one year but not in subsequent years?  
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• How will the new rules apply to issues such as staff discounts? Will the new rules apply in situations where the discount is standard company practice and applies to all staff? 
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• What evidence will auditors need to obtain to be satisfied that an expense, which has been charged to the fund by a member or a related party for a service provided, is on commercial terms? 

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Burgess noted that SMSFs were incurring fees on commercial arm’s length terms now for services provided to their fund by a related party, or by a trustee, and there was a direct link to a particular fund asset.  

“The ‘no-compliance’ action approach previously announced by the ATO only applies where the NALE relates to a general fund expense and this transitional period is due to expire on 30 June 2021,” he said. 

Burgess also said the “hottest topic” in the SMSF sector right now was the new auditor independent guidelines released by the Accounting Professional and Ethical Standards Board (APESB) in May 2020.  

He said from 1 July, the Australian Taxation Office would enforce compliance with the new requirements regardless of the income year to which the audit related to. 

The new rules would not allow in-house audits to be allowed by accounting firms that had prepared the financial statements of an SMSF, expect of the services provided by the accounting firm was considered “routine or mechanical”. 

The requirements set out by the board were hard coded in the SIS Act. 

“On consequences the ATO may choose to educate or more time to restructure if an SMSF auditor is making a genuine effort to comply. If they are not making a genuine effort to comply then it’s likely the ATO will report or refer the SMSF to the Australian Securities and Investments Commission [ASIC] and ASIC can take further action such as deregistering the approved SMSF auditor,” Burgess said. 

For trustees – if the auditor is found to not comply – the audit did not need to be done again and it was still considered as valid. However, if the auditor was deregistered the trustee would need to be engaged with a new auditor.  

On restructuring options, Burgess said if the firm wanted to hold on to the administration and preparation of accounts, they may choose to appoint a panel. 

“Or they may choose to outsource to another audit firm, or do an audit pooling arrangement. This is when an audit firms join with another in the same situation to come up with a pooling arrangement,” he said.