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ATO, Compliance & Regulation

NALI trustee services directive to come

NALI personal capacity

The treatment of services provided in a personal capacity to an SMSF in relation to the non-arm’s-length income (NALI) rules require more clarity.

Clarification is needed on how the proposed non-arm’s-length income (NALI) measures are applied to services provided to an SMSF by the fund trustees in their personal capacity, a senior technical services manager has said.

According to SuperConcepts technical services and education general manager Peter Burgess, confusion around what constitutes non-arm’s-length expenditure incurred when a trustee has provided services in a personal capacity has arisen as a result of Example 5 in the ATO’s Law Companion Ruling LCR 2018/D10.

The example in the ruling refers to a situation where a trustee who is a property manager by trade provides those services to her SMSF, but charges the fund only 50 per cent of the standard fee that would be charged to an external client. The conclusion reached is that this transaction constitutes a non-arm’s-length dealing and as such the income produced by the property asset in question would be treated as NALI.

“The reason we are concerned about this is because she’s provided this in her personal capacity. Discussions we’ve had with the ATO seemed to imply that where the trustees are providing something in their personal capacity, and not providing the resources of a third party, then that would not trigger these new provisions. So the question arises here [is] would it be any different if Sharon was not a licensed real estate agent,” Burgess said.

“These are the sort of questions that are still live issues that we don’t know the answer to.”

According to Burgess, the confusion has arisen over the use of the term personal capacity.

“We thought that if you’d provided the service in your personal capacity, that the NALI rules wouldn’t apply,” he said.

He shared with attendees what he thought the solution to the situation might be so as not to fall foul of the revised NALI rules.

“If we use the example of an investment adviser who is licensed to provide financial advice, if that person had their own SMSF and provides investment advice to that fund and they don’t use the resources of the company to do that, then we think you’re going to be okay. That won’t be NALI if the fund is not charged a fee for that service,” he said.

“So what that means is don’t put your fund on the list of funds that your firm is servicing.”

Burgess emphasised there had to be a direct nexus between the expense that had not been incurred and the investment income for NALI to apply.

He said he was expecting an official clarification soon.

“Hopefully when this legislation does get passed into law, the ATO will issue these guidelines in a final format that will address this particular example in their draft ruling because it did cause some concern and some confusion when it came out late last year.”

An amendment in relation to the treatment of statutory income for NALI purposes was also impending, he noted.

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