Another year doing my SMSF accounts free as the ATO kicks NALE can down the road

2 Jun 2020

Meg Heffron

Managing Director

Unfortunately the ATO has not finalised a controversial ruling issued last year that sought to treat all of a fund's investment income as "non-arm's length" income in situations where accountants or advisers provided services to their own SMSF at little or no cost using work resources. But they have done the next best thing and extended their "no compliance action" position for another year.

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Remember draft Law Companion Ruling (LCR) 2019/D3? This provided ATO guidance on how the Commissioner felt the non-arm’s length income (NALI) rules should apply to situations where funds incurred non arm’s length expenditure (NALE) (ie the fund’s expenditure was less than it would have been in an arm’s length situation).

In particular, the draft LCR set out the principles that:

  • If the NALE could be attributed back to a particular asset or assets, then the income in relation to those particular assets would be NALI, but
  • If the NALE related to the fund as a whole (for example, non arm’s length accounting fees), then all fund investment income would be NALI.

Naturally the position was contentious – not only did it seem an unduly harsh penalty for a relatively modest “problem” but it created ridiculous situations where some SMSF professionals would be better off paying someone else to look after their SMSF than using their own skills to do so.

A number of very mainstream situations were caught out by this interpretation – in a nutshell, virtually any SMSF professional using their own skills to provide services to their SMSF would have all fund investment income treated as NALI if they used any support from their workplace (eg a work computer, had the fund lodged by their work tax agent, relied on work insurance, used software provided by work etc).

When it released LCR 2019/D3, the ATO quickly put out a second document – draft PCG 2019/D6. This set out the transitional compliance approach that the ATO intended to take given the shockwaves they had just sent through the SMSF advice and accounting sector. In short, the PCG promised that the ATO would essentially ignore its own guidance and take no compliance action for situations that would otherwise fall foul of the new interpretation during 2018/19 and 2019/20.

Unfortunately we are still waiting for LCR 2019/D3 to be finalised.

Nothing has changed here.

However, we do have the final version of the PCG (released yesterday as PCG 2020/5). The only change made by this new release is to extend the transitional compliance approach to 2020/21 as well. So those of us with SMSFs where we use work resources to complete the accounts and tax return have one more year where we can put off deciding what to do.

Note that like the draft, this transitional relief only applies to NALE that cannot be specifically attributed to an investment and instead relates to the fund as a whole – for example, accounting fees. NALE that relates to a specific investment – for example, an artificially low interest rate charged on a limited recourse borrowing arrangement used to acquire a property – will ensure that all income associated with that asset is NALI.

As yet we have no idea what the longer term future holds. The fact that LCR 2019/D3 has not been finalised suggests that some of the impractical elements of the draft are at least being re-considered. Or perhaps I’m just being optimistic.