A recent Ruling issued by the ATO has placed the spotlight directly on Trustees who transact on a non-arms length basis, with regards to expenditure incurred by their SMSF.

In LCR 2019/D3 the ATO has adopted a far more stringent stance on the application of General
expenditure incurred deemed to be non-arms length. The result of which, is the classification of ALL the Fund’s income as Non Arms Length Income (NALI) and therefore subject to Tax at the highest Marginal Tax rate.

In the Ruling, the ATO gives the following example of a SMSF Trustee who is an Accountant by

Example – non-arm’s length expenditure incurred has a nexus to all income of the fund – NALI
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.

Whilst the application of this Ruling is far stricter than anticipated there is hope within the Industry that the ATO will soften its approach in the future, as discussed by Peter Burgess at the recent SMSF Adviser Summit 2019 CLICK HERE TO READ

For advice on your SMSF and the application of the recent NALI Ruling issued by the ATO seek
professional advice from an SMSF expert at Brown Macaulay & Warren.

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