Non-arm’s length expenses (NALE) and self-managed superannuation funds (SMSFs) – the new rules for general expenses finally released!

In the 2017 Budget, the government announced that the concept of ‘non-arm’s length income’ (NALI) for SMSFs was to expand to specifically include where an SMSF expense was not incurred, or less than would have been incurred had the parties been dealing on an arm’s length basis (NALE) – see for further information:

Changes to non-arm’s length income (NALI) rules for SMSFs – Cooper Grace Ward (cgw.com.au)

Income that is NALI is taxed to the SMSF at the top marginal tax rate rather than the usual concessional rates, so having additional amounts deemed to be NALI can result in a significant increase in tax for an SMSF.

We have seen much controversy on the effect of these NALE changes, especially as they apply to general expenses of an SMSF that do not relate to specific assets (for example, accounting and audit fees, or the fee to update a trust deed) – see for further information:

NALI, NALE and SMSFs – the ATO draws a new line in the sand with LCR 2021/2! – Cooper Grace Ward (cgw.com.au).

Some six years after the initial announcement, we now have the proposed legislation to deal with these general expenses in Schedule 7 to the interestingly named Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill introduced in 13 September 2023.

The new rules implement the most recent ATO interpretation and:

• apply to funds with six members or less (SMSFs and SAFs)
• include as NALI all the income from an arrangement where there was an expense that was not incurred, or the amount incurred was less than if the parties had been dealing at arm’s length
• where the expense does not relate to a particular asset, include as NALI an amount that is double the amount that would have been included as the expense, or the deficiency in the amount paid as compared to the amount that would have been paid if the parties had been dealing at arm’s length.

Although this proposed amendment to the NALE rules will only apply from 1 July 2023, the Bill clarifies that the NALE rules as implemented in 2018 still technically apply from 1 July 2019.

The ATO has previously announced a no action position in relation to expenses that do not relate to specific assets up until 30 June 2023.

With these rules now at the Bill stage, and the ATO no action position ending, it is important SMSF trustees and advisers are aware of the ramifications, and ensure there is evidence where necessary that the amount of an expense is an arm’s length figure.

If you have any questions about the NALI or NALE rules, please contact a member of our SMSF team.