Understanding the Practical Application of SMSF Expense Regulations
The Australian Parliament has recently passed significant reforms to the non-arm’s length expense rules for self-managed super funds (SMSFs), effective from the 2018-19 income year onwards. These changes are crucial for SMSF trustees and their advisors, as they introduce new compliance requirements and potential pitfalls.
Key Changes to NALI for SMSFs
The non-arm’s length income (NALI) provisions, updated in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, have introduced important amendments effective from 1 July 2024. These changes include:
- Limiting NALI for Small Funds: The amount of NALI arising from a non-arm’s length general expense is limited to twice the difference between the actual expense and the expected market rate for small superannuation funds.
- Exemptions for Large Funds: Large APRA-regulated funds are exempt from the non-arm’s length expenditure (NALE) provisions for both general and specific expenses. However, the remaining NALI rules continue to apply.
- Retrospective Application: The new rules exempt the application of NALE provisions for expenditures that occurred before the 2018-19 income year and apply retrospectively from 1 July 2018.
Practical Implications for SMSFs
The ATO has intensified its focus on the management of expenses by related parties within SMSFs. This heightened scrutiny necessitates a thorough understanding of the new rules and the ability to apply them correctly to avoid compliance issues.
Common Scenarios and Red Flags
SMSF trustees and accountants must be vigilant about scenarios that could trigger NALI or NALE issues. Some common red flags include:
- Non-Arm’s Length Transactions: Ensuring all transactions are conducted at arm’s length is crucial. Any deviation could result in NALI.
- Inappropriate Expense Claims: Identifying and correctly reporting non-arm’s length general expenses is essential to stay compliant with the new rules.
- Related Party Dealings: Special care is needed when expenses involve related parties, as these are a primary focus of the ATO.
ATO Guidance and Compliance Hot Spots
The ATO has provided updated guidance on managing these new rules. However, the administrative approach outlined in PCG 2020/5, which applied to non-arm’s length expenditure, expired on 30 June 2023 and will not be extended. Trustees and advisors must now navigate the complexities of the new legislation without this transitional support.
What Should SMSF Trustees Do?
- Review and Adjust: Examine all current and past expenses to identify any that may not comply with the new rules.
- Seek Professional Advice: If you’re unsure whether your SMSF is affected by these changes, consult with a tax or superannuation professional.
- Update Practices: Integrate the new methodologies into your financial practices to ensure ongoing compliance.
If you have any questions or need assistance in navigating the new NALI and NALE rules, contact the experts at BOA & Co. Our team of specialists is dedicated to helping you understand and comply with these complex regulations. Call us at 1300 952 286, email us at info@boanco.com.au, or visit our website at www.boanco.com.au.