In PCG 2020/5, the ATO has determined that its approach to the FY18-19, FY19-20 and FY20-21 tax years will be extended to include FY21-22.
This means that if a fund incurred certain general non-arm's length expenditure - that has a sufficient nexus to the fund's ordinary and/or statutory income in those income years - then the ATO will not expend its resources to determine whether the NALI provisions apply. This article outlines how non-arm's length expenditure is treated as NALI and the transitional compliance approach.Melissa Ramov, Maddocks Lawyers
Generally, an SMSF could incur non-arm's length income (NALI) (which is therefore income that is taxed at the highest marginal tax rate) if there is a scheme between parties which are not dealing with each other at arm's length and one of the following occurs:
More recently, the operation of the NALI provision has been extended to include circumstances where the fund incurs a loss, outgoing or expenditure which is smaller than what would be expected if the parties were otherwise dealing at arm's length as set out below (NAL Expenditure).
The treatment of NAL Expenditure as NALI was introduced after changes to section 295-550 of the Income Tax Act 1997 (ITAA97) were made by the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Act 2019.
An SMSF could incur NALI if there is a scheme between parties which are not dealing with each other at arm's length and one of the following occurs:
the SMSF derived income as a beneficiary of a trust through holding a fixed entitlement to the income of the trust and:
The ATO has announced that it will not allocate its compliance resources to determine whether the NALI provisions apply to a complying super fund for the FY18-19, FY19-20, FY20-21 and FY21-22 years where the fund has incurred NAL Expenditure of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the fund in those respective income years (for example, non-arm's length expenditure on accounting services).
The most recent announcement of the ATO agreed to extend its transitional compliance approach to the 2021-22 income year. Therefore, this approach will only apply to expenditure incurred on or before 30 June 2022.
The transitional compliance approach does not apply to NAL Expenditure which is expenditure incurred directly related to the fund deriving a particular ordinary or statutory income.
In order to determine whether there is a 'sufficient nexus' between the NAL Expenditure and all ordinary and/or statutory income derived by the fund, the NAL Expenditure must be incurred 'in gaining or producing the relevant income (or acquiring the relevant entitlement)'. Further the NAL Expenditure does not have to be deductible under section 8-1 of the ITAA97 for it to fall under the NAL Expenditure provisions4. For example, NAL Expenditure incurred to acquire an asset (including associated financing costs) will have a sufficient nexus to all ordinary or statutory income derived by the SMSF in respect of that asset.
A detailed set of examples can be found in the ATO's Law Companion Ruling 2019/D3.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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