The Australian Taxation Office (ATO) has decided to extend for a further 12 months the current transitional compliance approach set out in PCG 2020/5 to allow additional time to finalise its position on non-arm’s length expenditure (‘NALE’) within the NALI provisions (section 295-550 of the ITAA 1997).  

The ATO issued draft ruling, LCR 2019/D3 in October 2019 to clarify its position on how the law applies where parties do not deal with each other at arm’s length and the trustee incurs NALE including where they incur general expenditure that relates to all income that is derived by the fund.

This announcement was recently made by the ATO Assistant Commissioner, Justin Micale, and follows on from a further round of industry consultation on this specific issue within the draft ruling in December 2020.  The ATO has indicated that given the complexity and level of interest in the issue, it will now seek independent, specialist advice from the public advice and guidance panel before finalising the ruling.  This will result in a further delay to the release of the final ruling, meaning that the current PCG 2020/5 guidance will need to be extended through to 30 June 2022.

Specific unresolved issue

It is important to remember that there is only one issue of contention within the ruling – that is, where the fund incurs non-arm’s length expenditure of a general nature (e.g. accounting fees). For arrangements with NALE that directly relates to particular income derived, the NALI provisions have applied to these arrangements since 1 July 2018 (PCG 2020/5 does not apply).

The ATO will update PCG 2020/5 to reflect the transitional period of compliance from 1 July 2018 through to 30 June 2022.