The ATO will need to help trustees work out when an arrangement is internal to the fund for the purposes of non-arm’s length expense rules, says the NTAA.

The NTAA says imminent rule changes for super fund non-arm’s length expenses (NALE) fail to clarify a crucial distinction for fund members who provide services to their SMSFs.

It said the revisions reduced NALE penalties but left unresolved how to determine whether a trustee was acting as an individual or in their role as the fund trustee.

NTAA spokesperson James Deliyannis said the government had missed a chance to clarify the issue in its Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 introduced to Parliament last week.

“It is disappointing that the bill does not include any changes that would rectify the tension in the law that these rules create, even with respect to services that would only give rise to a general (not a specific) fund expense,” Mr Deliyannis said.

He said where a trustee or director (of a corporate trustee) provided services to their SMSF in their capacity as trustee or director the arrangements were considered internal to the fund and NALE rules did not apply.

An example would be where an SMSF trustee did bookkeeping work for their fund in their role as trustee and did not charge.

However, if an SMSF trustee had provided the same service in an individual capacity then the fund would breach NALE rules unless the trustee charged a market fee.

“Problems can arise in this situation because the SIS Act only permits a fund to remunerate a trustee/director in very limited situations,” he said.

“For example, a trustee/director can only be remunerated if they performed the services in the ordinary course of a business carried on by the trustee/director of performing similar duties or services for the public.”

“This requirement has proven to be particularly problematic for employees, as they typically do not also carry on a business in their own right and, therefore, cannot be remunerated for services they provide to their SMSF.”

Under the revised penalties, a breach of NALE rules that related to an SMSF general expense was classified as non-arm’s length income. The income was calculated as twice the amount of the discount received by the fund and then taxed at 45 per cent.

Mr Deliyannis said the penalties meant higher costs for many SMSFs and tricky decisions for the ATO.

“Unfortunately, the government’s position means that many professionals, particularly those who are employees, will be denied the opportunity to provide services to their SMSF where those services go beyond an internal fund arrangement,” he said.

“It is difficult to understand the reasoning behind this position, given that these services are generally provided to SMSFs by fund trustees or directors primarily to reduce costs and pass savings on to members.”

“The explanatory memorandum to the bill also does not assist with the important issue of determining when the provision of services by a trustee or director has gone beyond an internal arrangement and may be exposed to the NALE rules.”

“This lack of clarity has been a source of frustration for our members since the NALE rules were introduced in the 2019 income year.”

“As such, it will ultimately be up to the ATO to assist trustees and directors to identify what is and is not an internal fund arrangement for the purposes of the NALE rules.”

He said the ATO had previously released some guidance in Law Companion Ruling (LCR) 2021/2 but hoped it would update the document “to provide guidance on more commonplace arrangements.”

“For instance, it would be useful if the ATO provided its view on the scenario where an employee accountant prepares their SMSF’s accounts at work (e.g., after work hours) using their employer’s software, as well as preparing and lodging their SMSF’s annual return using their employer’s tax agent registration.”

Christine Chen
25 September 2023
www.smsfadviser.com