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The anticipated non-arm’s length expenditure (NALE) rules, which will oversee the regular costs of...
Compliance Risks with Property Developments in SMSFs - Risks of NALI
Navigating the world of Self-Managed Super Funds (SMSFs) involves paying close attention to all factors that can impact your financial trajectory, and today, we want to shed light on an issue linked to property development projects. If, at any point, your SMSF uses non-arm's length arrangements which give the fund any advantage, you risk tagging the entire project with non-arm's length income (NALI) implications.
Recently, a clarion call has been sounded to SMSF trustees and advisers who are engaged in property development schemes through Special Purpose Vehicles (SPVs). Specialist auditor Shelly Banton from ASF Audits warns that any non-arm’s-length dealings could potentially taint the entire scheme and the fund with NALI. This comes in the wake of the newly released ATO Taxpayer Alert 2023/2.
Banton emphasizes that SMSFs and their interposed entities that fail to establish arm's-length arrangements in relation to a property development project could find themselves in hot water over NALI breaches. In this scenario, the ATO may place the entire project under heightened scrutiny.
In Banton’s words, the non-arm's length dealings "encompass every party involved in a scheme, whether directly or indirectly, at every step along the way." If anything doesn't measure up to the arm's length standard, the potential consequences are far-reaching: not only could all income be deemed NALI, but under certain circumstances, even the capital gain on disposal might fall under the NALI banner.
Further elaborating on the topic, Banton pointed out that initial arm's-length transactions with a Special Purpose Vehicle do not exempt an entity from its ongoing obligations under the Income Tax Assessment Act 1997. Just because the fund acquires shares in an interposed entity at an arm's-length price doesn't mean NALI considerations will not apply later on.
Banton highlighted different scenarios where NALI could potentially kick in, including instances where the interposed entity might engage in non-arm's length transactions to maximize profit, eventually benefiting the fund. This might involve borrowing money from another entity on non-arm's-length terms to amplify profits.
The message from the ATO, as conveyed by Banton, is crystal clear: any involvement in a scheme is subject to amplified scrutiny. Our key advice to clients is to tread carefully when planning or in the middle of a property development project. Stick to the rules, stay within the lines, and be aware of potential pitfalls. The ATO is keeping a close watch on this matter, and proactive compliance is your best line of defence against unanticipated complications.