Just when you thought we’d turned a corner

From the Editor- Darin Tyson Chan, Inaugural SMSF Association Trade Media Journalist of the Year

The SMSF community has been a very happy lot since federal budget night and the subsequent parliamentary sittings, which have both resulted in what can only be considered beneficial framework changes to the superannuation system.

Included in the government’s kit bag has been the passing of the legislation allowing SMSFs to service six members, the ability for 65 and 66 year olds to access the nonconcessional contribution bring-forward rules, the proposed two-year amnesty to address issues with legacy pensions, the scrapping of the work test for individuals wanting to make non-concessional contributions up to the age of 75, and the list goes on and on.

After all of these positive moves the sector could be forgiven for thinking we’d all turned a corner and legislation and regulations that have served to stymie SMSFs and create more red tape for them, as we have witnessed too many times, were a thing of the past.

But just as government and regulators can giveth, they can also taketh away and this was demonstrated with the release of the final version of ATO Law Companion Ruling (LCR) 2021/2, which deals with the non-arm’s-length expenditure, or NALE, rules.

Since the introduction of the draft version of LCR 2021/2, concern has been high over its treatment of general expenses considered not to be incurred at arm’s length and the severity of the penalty that would allow the entire income of the SMSF to be taxed at the highest marginal rate of 45 per cent.

And these fears have now been realised with the ATO confirming NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

Until the announcement on 28 July there was an expectation the material nature of NALE would be taken into account through a de minimis provision, but this unfortunately has not turned out to be the case.

The ATO did concede a fund needs to be charged on a commercial basis only in situations where a trustee or member provides a service to it where a particular type of licence or qualification or insurance cover is required to provide the service in question.

While this seems to take the situation where a financial planner uses their expertise to formulate an investment strategy for their own SMSF without charge out of the NALE conversation, uncertainty still surrounds so many other circumstances that could lead to the application of the highest marginal tax rate to the fund.

The SMSF Association pointed out immediately the current version of LCR 2021/2 could easily lead to the NALE rules being triggered by a transaction involving an insignificant amount of money. Further, Chartered Accountants Australia and New Zealand, the Institute of Public Accountants and The Tax Institute have warned the nature of the ruling allows no room for error.

All four industry bodies have already called on the government to review the ruling and allow for some common-sense amendments to be made. This is after a consultation period already took place following the release of LCR 2019/D32 in mid-2018.

We can all only hope these appeals will not fall on deaf ears or else the sector may have to steel itself for a particularly difficult period that could see, in a worst-case scenario, a significant rise in SMSF wind-ups.