The ATO’s draft ruling around the application of new non-arm’s length income rules may contain further “wiggle room” when it comes to financial professionals providing services to their own SMSF, according to SuperConcepts.
Hopes for further ‘wiggle room’ on NALI application
Addressing SMSF Adviser’s SMSF Summit 2019 in Sydney on Thursday, the SMSF service provider’s general manager, Peter Burgess, said similarly to the changes to LRBA rules released in 2010, he expected the regulator to further clarify the issue of general expenses and NALI in trustees’ favour in its subsequent final ruling on the application of the new laws.
“You might remember the Treasury bought in new rules in 2010 to say if you make any changes or improvements to LRBA assets, it’s a new asset and you’re in breach of the rules. The ATO came out and said, unless you change the character of the property, then it’s okay,” Mr Burgess recalled.
“They found some wiggle room in the legislation, and I think they’re going to have to do something similar here, because I don’t think this is workable in its current form.”
Mr Burgess said there were question marks around the way the draft ruling had applied the legislation, given its original purpose in the explanatory memorandum of the bill.
“If you go back to the intended purpose, when I read that purpose statement, that read to me that there must be a direct link between the income the fund receives and the expenses they’ve incurred,” he said.
He suggested that carve-outs for general expenses and trustee services would be a simple way to ensure the original purpose of the bill was achieved, rather than having accountants or planners who provided discounted or free services to their SMSF caught by the rules through technicalities such as using their work computer to lodge their SMSF annual return.
“Perhaps one solution is to define what we mean by trustee services or a general expense and carve that out, so it doesn’t matter who is doing this fund-level activity, like tax returns or those sort of things,” Mr Burgess said.
“Currently, this takes us down some bizarre outcomes like, as a registered tax agent, if I’m working on my fund’s return at lunchtime and I lodge in on the company computer, I have to make sure I charge my fund an arm’s length expense. If I do it at home on my personal computer, I don’t have to charge my fund an expense.”
While the ATO was still consulting on the draft ruling, Mr Burgess said if the specifics of the legislation did not allow the regulator enough discretion in interpreting the rules, there may need to be further discussion or amendments at a government level.
“I’m sure the ATO does not want to apply the law in this way, so the question is probably a question for the minister: is this what the government intended when they passed this legislation, that we would have the law applying to general expenses in this way?” he said.