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ATO, Tax

ATO grants NALE transitional period

ATO arm’s-length arrangements

The ATO has given SMSFs a transition period to fix any non arm's-length arrangements with their fund to prevent it falling foul of new tax provisions.

The ATO has given SMSF trustees a transition period to ensure all of the services they are providing for their funds are being carried as proper arm’s-length arrangements as defined by the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019.

The concession was confirmed via Practical Compliance Guideline (PCG) 2019/D6, which applies to income years 2018/19 and 2019/20 and effectively allows SMSF trustees to remedy arrangements regarding their servicing of their own fund that would be caught by the new non-arm’s-length expenditure provisions.

“So if you’re an accountant [and an SMSF trustee] and you are undertaking the completion of [your fund’s] tax return and you’re either not charging a fee, or charging a fee you would not otherwise be charging your other clients, then for the current year and the 2018/19 prior year all of the income of the fund would be taxed at a 45 per cent tax rate [under the new legislation],” Smarter SMSF chief executive Aaron Dunn said.

“Due to the fact that we had a delay in the legislation coming, the ATO is saying you will not be subject to the non-arm’s-length income provisions for those specific years.

“But if you do not put in place a commercial arrangement [for these services] by 1 July 2020, for the 2020/21 year, then the non-arm’s-length income rules will apply to all of the ordinary and statutory income of the fund going forward.”

Dunn said rectification of this situation means the trustee would have to remove themselves totally out of the framework of section 17B of the Superannuation Industry (Supervision) Act.

He added the trustee would therefore be unable to use any of the resources of the business in performing services for the fund. However, if these resources were to be used, the trustee would have to charge the SMSF a commercial fee for those services, he noted.

There is a catch to PCG 2019/D6 in that services a trustee provides to their own SMSF on a non-arm’s-length expense basis can only be rectified for the 2018/19 and 2019/20 income years if the arrangement has a significant nexus to all of the income of the fund, he pointed out.

“So if we have something that relates to specific income of the fund, we are going to have to apply the non-arm’s-length income requirements to that income for the 2018/19 and 2019/20 years,” he said.

Other clarity regarding how a trustee can provide services to their own SMSF is covered in Law Companion Guide 2019/D3.

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