The Australian Taxation Office (ATO) has made it clear: when a self managed superannuation fund (SMSF) receives services or assets on non-commercial terms - or fails to incur necessary expenses - the result can be harsh. Non-arm’s length expenditure (NALE) can trigger nonarm’s length income (NALI), exposing the fund to significant tax consequences.

Following the passing of changes to non-arm’s length expenditure (NALE) rules through Parliament on 25 Jun 2024, the Australian Taxation Office (ATO) has finalised its Taxation Determination TD 2024/5 (previously Draft TD 2023/D1).

After a number of years in the making, the changes to the non-arm’s length expenses (NALE) rules have now passed through Parliament. While, as previously noted, the changes did not go far enough for many of the tax industry, and accounting bodies, the changes offer some relief to taxpayers.

The ATO has taken an aggressive approach on non-arm’s length income (NALI) for a number of years now, both in its public documents and via its audit teams. This has culminated in an approach that puts a high expectation on SMSF’s in relation to proving arrangements are on an arm’s length basis – in particular, in relation to benchmarking such arrangements.

After industry pushback against the disproportionate application of the non-arm’s length income (NALI) and non-arm’s length expenses (NALE) rules, Treasury has a released a discussion paper to modify the application of the NALI/NALE rules.

Phil Broderick provides the latest developments with NALI and NALE in The SMSF Advisor Show.

After seeking advice from an independent advice panel, the ATO has released its finalised Law Companion Ruling setting out the ATO view on the non-arm’s length expenditure (NALE) amendments to section 295-550 of the Income Tax Assessment Act 1997 (ITAA97), LCR 2021/2. In addition, the ATO has amended its contribution tax ruling TR 2010/1. The final LCR and amendments to TR 2010/1 partially soften the ATO views on the application of NALE.

The ATO has provided some welcome clarification for auditors regarding their obligations to report on non-arm’s length expenditure (NALE) incurred by a super fund of a general nature.