SMSF Association welcomes NALI clarity

The SMSF Association has welcomed the Australian Taxation Office’s (ATO’s) ruling on non-arm’s length income (NALI), including excluding where SMSFs trustees provides services to their own fund.

SMSF Association chief executive, Peter Burgess said the ruling ]s were welcome because they provided certainty in areas that have been frustrating trustees and their advisers for some time.

“It is pleasing to see the ATO clarify that the NALI provisions will not apply in situations where an SMSF trustee has provided a service to their own fund but is unable to charge their fund a fee without breaching the Superannuation Industry (Supervision) Act 1997,” he said

Burgess strongly endorsed this pragmatic approach but said it was disappointing it wasn’t applied to other issues covered by LCR 2021/2.

“Valuations remain one of the most pressing issues,” he said. “While the ATO’s existing guidelines are a useful tool for determining the value of fixed assets such as property, they provide little assistance when it comes to valuing services.”

“Furthermore, the rulings fail to clarify whether using a market value within an acceptable range is sufficient, instead appearing to require trustees to justify a single value point – a rigid approach that risks leaving them exposed when commonsense flexibility is needed.”

Burgess also cited situations where the NALI provisions were enlivened by the unintended or the minor undercharging of a capital expense incurred in relation to a specific asset of the fund as another area where a more pragmatic approach was needed.

“It is difficult to comprehend that a minor undercharging of a capital expense, such as replacing a single vanity in a property owned by an SMSF on non-arm’s terms, could result in the entire capital gain on that property being taxed as NALI when it was eventually sold.

“We think the ruling was a missed opportunity for the ATO to consider safe harbour or de minimis thresholds to avoid small and often inadvertent oversights that may permanently expose all income and capital gains from an asset to the punitive 45 per cent tax rate.

“This rigid approach is disproportionate and risks punishing trustees for minor errors with life-long tax consequences,” Burgess says.

The Association also highlighted minor changes in LCR 2021/2 that acknowledged services related to an SMSF’s tax affairs that fell within section 25-5 of the Income Tax Assessment Act 1997 were not caught by NALI.

“This further clarification is welcomed, however given how commonly these services arise, we think it warranted more than a brief footnote and passing reference in the examples,” Burgess said.

The guidance around discount policies and employee share schemes has shifted from a narrow focus on trustee “influence” to a broader test of commerciality, which was welcomed by the Association.

“However, without practical examples – especially for small businesses where SMSF trustees often wear multiple hats and inevitably influence discount policies, this guidance will be difficult to apply in practice.”

“The length of the compendiums demonstrates how many issues were raised across the industry, and as we continue to work through the detail it’s obvious more work remains to be done.”

“We will continue to engage with the ATO – pushing for clearer and more practical compliance settings that give trustees and industry the confidence to operate without fear of ATO compliance action or disproportionate consequences for inadvertent or minor errors,” Burgess said.