The recent release of Law Companion Ruling, LCR 2019/D3 provided some important feedback regarding arrangements where trustees of a SMSF may be acting within an individual capacity and have non-arm’s length expenditure that will have a sufficient nexus with income derived by the fund for the non-arm’s length income (NALI) provisions to apply. Where the expenditure incurred (with can include nil amounts) is general in nature and has a sufficient nexus to all of the ordinary and/or statutory income of the fund the NALI rules will apply from 1 July 2018, including to arrangements that may have been in existence prior to this date.
However, the Commissioner has set out a transitional compliance approach within PCG 2019/D6 that recognises that such arrangements for 2018-19 and 2019-20 income years will not be subject to the NALI provisions where it has incurred non-arm’s length income of a general nature. The common example provided within the ATO’s guidance is accounting services where the fund’s compliance requirements, being of a general nature is expenditure incurred that has a sufficient nexus to in producing both ordinary and statutory income.
Currently travelling around Australia for CPD training presenting to both accountants and advisers, there has definitely been a heightened level of concern regarding the broad impact of the NALI provisions for various professionals (in particular, using services from within inside of their practice). Of most interest therefore is:
- who the transitional compliance approach extends to?; and
- what areas constitutes a fund incurring non-arm’s length expenditure that is of a general nature with sufficient nexus to all of the ordinary and statutory income?
What other arrangements qualify?
Whilst accountants breathe easy with the ability to remedy existing internal arrangements, PCG 2019/D6 doesn’t appear to clarify other circumstances which may be of a general nature that has a sufficient nexus with all of the fund’s income.
Take for example the role of a financial adviser, where they may be acting in an individual capacity with their SMSF and undertake the following:
- are involved preparation and ongoing management of the fund’s investment strategy; and
- utilise the resources of their practice to do so; and
- would be covered under an insurance policy of their practice; and
- may or may not charge a fee for these services (relying upon the s.17B definition within the SIS Act for non-trustee duties).
Note that the requirements for the fund to have an investment strategy and need for regular review forms part of both the:
- the SIS covenants with section 52B, SISA; and
- the Operating Standard within SISR 4.09.
Therefore, where the adviser is undertaking such services and the fund’s incurring non-arm’s length expenditure (incl. nil), it would appear that a sufficient nexus exists of a general nature to all of the fund’s ordering and statutory income? And, as a result the transitional compliance approach would apply? If not, certain existing arrangements will already be subject to the NALI tax rate of 45%.
Nexus to specific income
The Practical Compliance Guidance appears sufficiently clear enough to deal with arrangements that relate to specific expenditure in producing income – example 7 within PCG 2019/D6, explains the direct nexus to particular ordinary or statutory income (i.e. rental income) derived by the fund where the licensed real estate agent provides property management services to the residential property owned by the member’s SMSF.
Further guidance
It would appear that further guidance on these matters would be prudent by the Regulator in finalising LCR 2019/D3 and PCG 2019/D6, in particular on the areas of SIS compliance that the ATO would consider is general in nature and has a sufficient nexus to all of the fund’s ordinary and statutory income.
Webinar recording
Smarter SMSF recently ran a webinar on this topic, how gnarly is NALI. You can purchase this recording to watch from within the learning management system, available on the Smarter SMSF platform. To purchase, simply click on the link below:
