Much Ado About NALE

16 Nov 2023

Written by

David Busoli, Principal

There has been much said, over the last few years, regarding the non-arm’s length expenditure changes. The focus has been on general expenses where a non-arm’s length activity taints the whole of the fund’s income. Though the initial proposal was draconian in its application it has morphed into something much more benign.

Essentially, where a non-arm’s general expense has been detected, say that accounting or financial planning work has been provided at no charge, the way that the penalty is applied is as follows:

Value of SMSF accounting services provided at no charge is     $4,000

Fund Income (excluding assessable contributions)                   $50,000
less eligible deductions                                                               $10,000
Net Fund income (the cap)                                                              $40,000

The NALI Component is $8,000 (2 x $4,000) being twice the non-arm’s length expense.
It is capped at the net fund income which means that the NALI component, in this example, is $8,000. This amount is taxed at 45%.

It is problematic as to whether NALE will be reported as the ATO is not going to investigate situations where:

  • a reasonable attempt has been made to apply an arm’s length amount or
  • a broad staff discount has been applied or
  • the trustee has provided the service in their capacity as trustee only.

Importantly, this is not a SIS compliance area so is not something the auditors are required to check.

Significantly, all four accounting bodies and the SMSF Association, has called for the NALE amendment to be abandoned. More to come.

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