Legislation has recently passed to strengthen the non-arm’s length income (NALI) provisions contained in section 295 of the ITAA97.
Non-arms length income derived by a SMSF can be taxed at the highest marginal rate rather than the 15% concessional rate.
Starting from the 2018/19 year, the provisions will also apply where a SMSF deals with related parties and incurred expenditure is less than it otherwise would be if it was dealing at arms length.
This has direct implications for Accountants who have historically not invoiced or heavily discounted fees to related SMSF’s
Law Companion Ruling LCR 2019/D3 provide two clear examples for accountants to consider.
NALI does apply
“For the 2020-21 income year, Mikasa as trustee of her SMSF, engages an accounting firm, where she is a partner, to provide accounting services for the fund. The accounting firm does not charge the fund for those services.
For the purposes of subsection 295-550(1), the scheme involves the SMSF acquiring the accounting services under a non-arm’s length arrangement. The non-arm’s length expenditure (being the nil amount incurred for the services) has a sufficient nexus with all of the ordinary and statutory income derived by the SMSF for the 2020-21 income year. As such, all of the SMSF’s income for the 2020-21 income year is NALI.”
NALI does not apply
“Leonie is a trustee of an SMSF of which she is the sole member. She is a chartered accountant and registered tax agent who is employed in an accounting and tax agent business. Leonie in her capacity as trustee, prepares the accounts and annual return for the fund. She does not use the equipment or assets of her employer, nor does she lodge the annual return using her tax agent registration.
As she performs these duties or services as trustee of the SMSF, she does not charge the fund for this work. The non-arm’s length expenditure provisions do not apply as the duties or services performed by Leonie are in her capacity as trustee rather than under an arrangement in which parties are dealing with one another on a non-arm’s length basis.”
What does this mean?
Clearly you need to start charging your SMSF a market fee if your firm is providing services.
In relation to clients, there may be situations where time is traditionally charged to their operating business entity rather than the SMSF (or the SMSF fee is discounted). You need to also review this arrangement.
ATO compliance activities?
The ATO has indicated in Practical Compliance Guideline PCG 2019/D6 they will not be allocating resources to audit this issue in the 2018/19 or 2019/20 year.
As always, if you need help please don’t hesitate to contact me at TriSuper Auditors on 1300 TRISUP for further info.