Compliance relief for NALI extended for an additional year

In an online update on its advice and guidance issue list, the ATO has announced that it would not be allocating compliance resources in the 2022-23 financial year to determine whether the non-arm’s length income provisions apply to all the income of the fund where it incurs non-arm’s length expenditure of a general nature on or before 30 June 2023. 

The compliance relief provided in relation to non-arm’s length income under PCG 2020/5 was previously due to cease at the end of this month.

“The extension will provide the community with greater certainty on our administrative approach while we work on resolving the concerns of industry,” the ATO stated.

The ATO is set to release an updated version of PCG 2020/5 this Friday (10 June).

The ATO had previously indicated at the end of March that it would not be extending the compliance relief in PCG 2020/5 despite an announcement by the former Coalition government that it intended to make legislative changes to ensure the non-arm’s length expense provisions operate as envisaged.

ATO assistant commissioner, SMSF regulatory branch, Justin Micale previously stated in March that the ATO needed to administer the law as it currently stands, with the scope and the timing of any potential legislative change not clear.

It is understood that the newly elected Labor government also supports making changes to the operation of the non-arm’s length expense provisions and accepts that there are some onerous outcomes for “unintended misdemeanours”.

PCG 2020/5 was first issued back in May 2020 following the controversy of the Commissioner’s general expense nexus view.

The PCG was initially introduced for FY2019, FY2020 and FY2021 with a later amendment to provide that it also covered FY2022.

DBA Lawyers senior associate Shaun Backhaus reminded SMSF professionals and trustees that the ATO’s administrative concessions provided in PCG 2020/5 are only relevant to a lower general expense that gives rise to NALI.

This means that where an SMSF purchases an asset at less than market value, this can result in all future income and capital gains from the asset being taxed as NALI, Mr Backhaus warned.

This latest announcement from the ATO provides some welcome temporary relief for the general expenses issues, he said. 

“However, the ATO may still apply NALI if its usual compliance activities detect it. A legislative fix is therefore urgently needed,” he stated.

Advisers, he said, should take steps to minimise the risk of the NALI provisions applying and ensure appropriate documentation exists to confirm that all dealings are at arm’s length, particularly services that may give rise to a general expense risk.