Stuart Forsyth, who left the ATO in 2014 and is now a non-executive director at SuperConcepts, said the ATO’s crackdown on non-arm’s length income in recent years has come to fruition in recent months from a revenue collection perspective.
Mr Forsyth said he has seen numerous situations recently where the SMSF trustee has advantaged their fund some years ago with a transaction, and the commissioner has now issued a position paper to them suggesting that it raise non-arm’s length income against the fund.
The ATO tends to provide a position paper in the latter stages of an audit to explain their position and give the trustee a chance to respond before it finalises the audit.
“In the ones that I’ve seen the trustee has undertaken the transactions but they haven't really gone and got a ruling from the commissioner at the time and they haven't gotten a contemporaneous valuation,” he explained to sister title SMSF Adviser.
“It's difficult to prove after the event, especially when the investment has gone very well, that the fund wasn't advantaged if you hadn’t documented it well at the time.”
A lot of the funds affected have generally been in pension phase so they’ve gone from paying zero tax to 47 or 45 per cent in more recent years, he cautioned.
“There are some serious issues there so if someone plans to advantage their fund in any way or they’re going to deal on a non-arm’s length basis with their fund, then they really need to get advice before they do that so that they've got a defensible position if the commissioner comes along some years later.”
The NALI road
Investments in an SMSF have always been required to be made and maintained on an arm’s length basis, but NALI grew as a compliance focus for the ATO following a landmark private binding ruling issued in April 2014.
The ruling related to an SMSF borrowing 100 per cent of an asset’s value on an interest free, related-party loan, and saw the ATO take a more hardline approach with its application of the NALI provisions.
“Essentially what they’re saying here is that if you have a limited recourse borrowing arrangement with a related party loan and the trustees are borrowing 100 per cent of the purchase price of the asset, it’s unlikely to be a commercial arrangement,” said SuperConcepts’ Peter Burgess at the time.
“Therefore the trustees are obliged to treat the income that the fund receives as non-arm’s length income, particularly if there is no interest being charged or other loan terms when assessed holistically are not on commercial terms.
“This is a ‘landmark’ decision… the ATO has previously said zero interest rate loans are not necessarily going to breach the rules, but this decision says it may result in the income being treated as non-arm’s length income, which may compromise the tax efficiency of the whole strategy.”
You can read about the private binding decision in full here.