NALE bill lag creates huge risk

NALE non-arm's length expenses PCG 2020/5

SMSF trustees cannot rely on PCG 2020/5 from 1 July 2023 to avoid a severe tax penalty should they incur non-arm’s-length general expenses.

Two prominent lawyers have warned about the danger of relying on Practical Compliance Guideline (PCG) 2020/5 with regard to non-arm’s-length expenditure (NALE) of a general nature for transactions that have occurred after 30 June 2023.

The bill to legislate the NALE rules was introduced to parliament in September and is yet to pass both houses, however, the ATO’s commitment to not allocating any enforcement resources to police the NALE general expense rules, stated in PCG 2020/5, expired on 30 June.

DBA Lawyers director Daniel Butler and Victorian Bar barrister Simon Tisher both acknowledge this timing misalignment could expose SMSF trustees with general expenses incurred on non-commercial terms to having their entire fund earnings taxed at the highest marginal rate.

“There’s exposure from 1 July onwards this year until the legislation is passed,” Tisher recognised.

To this point Butler asked: “So if there is a $100 discount on an accounting fee, [what are] the consequences [now]?”

Tisher answered: “It would be a general expense NALE, taint all the assets of the fund and taxed at 45 per cent, including assessable contributions because they’ll only be carved out if the bill is passed.”

He pointed out this situation could be avoided if the conditions outlined in PCG 2020/5 were extended again.

“If the bill becomes law, maybe the commissioner will recognise there is a gap that is not covered [by either PCG 2020/5 or the legislation],” he said.

Butler suggested there is another possible solution to the matter.

“Maybe we could [appeal] to the ATO to consider extending that PCG until the bill is enacted and people then will not be in this big situation of almost falling off a cliff if they get a $100 [accounting fee] discount,” he suggested.

“A $100 discount may not be a good example because I don’t think the ATO would chase a $100 discount, but it’s just [been used] to express the point.”



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