Contributed by William Fettes, Senior Associate, and Daniel Butler, Director, DBA Lawyers
In the world of financial regulations, staying compliant is paramount. This holds especially true for firms offering discounted services for Self-Managed Superannuation Funds (SMSFs). Failing to establish a proper discount policy aligned with the Australian Taxation Office's (ATO) guidelines could lead to Non-Arm's Length Expenses (NALE) and potential tax liabilities under the Non-Arm's Length Income (NALI) provisions.
Under current legislation, SMSFs that incur general fund expenses deemed as NALE or those that should have been incurred at arm's length but weren't can face a substantial 45% tax liability. This tax rate applies to various aspects of the fund's income, even when the SMSF is in the pension or retirement phase. The ATO's view is that reduced or nil general fund expenses significantly impact the fund's income.
Previously, the ATO offered some relief through the Practical Compliance Guideline PCG 2020/5, but this transitional approach ended on July 1, 2023. Consequently, firms must revisit their discount arrangements to effectively manage NALI/E risks.
Creating an Appropriate Discount Policy
Developing an appropriate staff discount policy benefits both firms and their staff members. It is essential for:
Policy Framework: Establishing a formal policy document outlining the terms of the discount.
Consistency: Ensuring that the discount aligns with normal commercial practices and is supported by benchmark evidence.
Uniformity: Making sure the same discount is available to all eligible individuals.
Proposed NALE Legislation
Treasury's Exposure Draft for the "Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non-Arm's Length Expense Rules for Superannuation Funds" (NALE Bill) introduces a cap on NALI arising from non-arm's length schemes involving lower or nil general fund expenses. However, this cap doesn't apply to capital expenses. The NALE Bill also includes other important measures, like excluding assessable contributions from NALI. Although these changes aim to mitigate the impact of NALE, they are still awaiting finalization and legal passage.
Given this uncertainty, firms are urged to act swiftly to formalize their staff discount arrangements.
In Law Companion Ruling LCR 2021/2, the ATO clarifies that discount arrangements under an appropriate policy will not trigger NALI. For these arrangements to meet the arm's length criteria, they should be consistent with normal commercial practices and accessible to all eligible individuals, including employees, partners, shareholders, or office holders.
Discounts for Non-SMSF Work
LCR 2021/2 predominantly addresses staff discounts related to SMSF services. If discounts extend to unit trusts or companies associated with a staff member's SMSF, they must be supported by objective benchmark evidence. Services provided to other entities should be invoiced separately to maintain a clear separation from SMSF invoicing.
Firms providing discounted services to staff members' SMSFs must act promptly to minimize NALI/E risks. This entails the creation, documentation, and implementation of an appropriate staff discount policy. Additionally, staff members should receive training and guidance on managing NALI/E risks.
By ensuring compliance, firms not only safeguard themselves and their staff but also contribute to transparency and trust within the SMSF sector.
This article was originally published on the DBA Lawyers website and has been reproduced with permission.
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