ATO checklist for SMSF management

The ATO has released a range of checklists designed to help trustees manage their SMSF through different stages of the fund.

The new ATO checklist provides guidance covering SMSF management requirements and obligations for trustees.

“Running an SMSF takes time and effort. There is a lot to do and keep track of at every stage of your fund. Use these checklists to help you manage your fund and meet your SMSF obligations,” the ATO said.

The guidance provides a detailed checklist for setting up an SMSF. It also focuses on trustees reporting obligations such as valuing the funds’ assets at their market value at 30 June, making sure the fund has paid any minimum annual income stream payments required under super laws.

It also outlines the ongoing SMSF compliance obligations across investing, contributions and rollovers, paying benefits and record-keeping requirements.

The ATO also outlined the importance of the investment strategy along with the need for regular review and consideration of all circumstances of the fund, including risk, diversity, liquidity and member’s circumstances.

Trustees must also make sure all benefit payments made by the fund have been made in accordance with the super laws and the proper and accurate records have been maintained for required time frames.

The new guidance also provides updated information on SMSF rollovers to align with the new SuperStream requirements.

Funds must make sure to engage an SMSF messaging provider offering SuperStream rollover services and obtain their electronic service address.

The checklist guidance also outlines additional steps to consider when starting to pay an income stream, along with considerations when winding up a fund.

The checklist can be viewed here.

Source: SMSF Adviser

SMSFs see millennial and Gen Z surge

Despite market uncertainty in recent years, the next generation of Australians is seeking to take greater control of their financial future by opening SMSFs, according to AUSIEX.

Recent data from AUSIEX (Australian Investment Exchange Limited) has revealed during the first quarter of FY22 (July to September) that there was a 9.3 per cent increase in new SMSF accounts opened compared to FY21 Q1.

Gen Y or millennials (born 1981-1996) represent the fastest-growing segment of new SMSF accounts. The year 2020 onwards has seen a new pattern emerge, with this group representing 10 per cent of all new accounts – double the rates seen from 2016 to 2019.

During FY21, there was also an emerging trend in SMSF accounts opened by Gen Z (born 1997-2012). The number of SMSF accounts owned by Gen Z investors has doubled in the past 12 months. 


AUSIEX CEO Eric Blewitt said recent years of government and regulatory reviews of the super system has most likely prompted greater awareness of super among younger Australians.

“SMSFs have traditionally been the domain of those with higher fund balances and those approaching the decumulation phase,” Mr Blewitt said.

“SMSFs may be appealing to younger people due to the fact they provide greater control over investments.”  

Mr Blewitt said the data was consistent with AUSIEX’s report, Australia’s Trading Transformation, released in June, which found a 250 per cent increase in self-directed investors under the age of 25 trading during the initial COVID lockdown in Australia through to March 2021.

“All of this data is painting a picture of much greater interest from younger people in taking control of their financial goals,” he said.

In recent years, female SMSF account holders have increased, with the male to female ratio for new SMSF account holders now 1 to 1.33. One in three Gen Y/Gen Z investors is female. This is consistent with data published in Australia’s Trading Transformation report, which showed 52 per cent of new trading accounts opened in the 12 months to March 2021 were by women.

Increase in active traders but less so in ETFs 

The AUSIEX SMSF book has grown by an average of 5 per cent for each of the last three years and is made up of 53 per cent Advised (advised and advised platform), and 47 per cent directly held accounts. Advised SMSF new accounts have seen a renewed increase since June 2021, with September 2021 representing a 16-month high.

Over time, AUSIEX has found that SMSF accounts are 30 per cent more likely to trade compared to non-SMSF accounts. SMSF accounts activate faster than non-SMSF accounts, with more than half trading within 90 days of being opened (54 per cent) compared to only 42 per cent of non-SMSF accounts.

SMSF accounts have executed 20 per cent of all AUSIEX trades since 1 January 2020. Since SMSFs are 10 per cent of all AUSIEX accounts, trading is double the expected amount compared to size.

The top 10 most traded stocks for the SMSF segment are heavily weighted towards blue chips, with BHP, Westpac, CBA, NAB, Woodside Petroleum, CSL, ANZ, Fortescue Metals, Macquarie Bank, and Telstra making the list.

However, SMSF accounts are less invested in ETFs compared to other accounts. New accounts held by Gen Z surprisingly have the lowest percentage of ETF investments (19.23 per cent) in their SMSF compared to all older generations, who sit between a range of 27 per cent to 32 per cent.

Those that traded ETFs tended to favour Australian Equities or US Equity ETFs, such as Vanguard US Total Market Shares Index ETF (VTS), iShares Core S&P 500 ETF (IVV), and BetaShares Nasdaq 100 ETF (NDQ). 

AUSIEX also saw some initial interest amongst SMSF investors in newer MegaTrend ETFs, such as ETFS Semiconductor ETF (SEMI), ETFS Hydrogen ETF (HGEN) and very strong interest in BetaShares’ Global Cybersecurity ETF (HACK).

“The long-held view that Australians do not actively engage with their super until they near retirement looks to be changing,” Mr Blewitt added.

“However, this data raises questions whether advisers and fund managers might need to pivot to attract and retain clients who appear to be paying much more attention to their super and the investments within.”

Source: SMSF Adviser

New rules to reduce choice complexity for SMSFs when calculating ECPI

The government has made new changes in its recent legislation to simplify choice for SMSFs when calculating exempt current pension income (ECPI).     

Recently the government introduced to the lower house the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 that includes six measures, of which five relate to superannuation.

Schedule 5 to the bill introduces the measure that was first announced as part of the federal budget in 2019 to allow SMSF trustees to choose how to calculate exempt current pension income (ECPI) where the fund has both retirement phase and non-retirement phase interests and a period of “deemed segregation”.

In a recent update, Accurium said that the draft legislation in this schedule is quite different from the exposure draft legislation that was released by Treasury on 21 May 2021, which raised a number of concerns. It appears that the main concerns from the previous exposure draft legislation have been addressed. 

There are two methods for calculating ECPI, the segregated method and the proportionate method. Since the 2017-18 income year, a fund may have to use a combination of the segregated and proportionate methods to claim ECPI in the same income year. Generally, this occurs when there is a period of deemed segregation during the income year, as well as a period where there is both retirement and non-retirement phase balances.

An SMSF that does not have “disregarded small fund assets” (DSFA) must use the segregated method to claim ECPI for a period of “deemed segregation”, while ECPI is claimed using the proportionate method for the pool of assets that supports both retirement phase and non-retirement phase interests.

Provided the SMSF has only account-based pensions, it will only require an actuarial certificate to claim ECPI using the proportionate method for the unsegregated pool of assets.

“The bill amends section 295-385 ITAA 1997 so that superannuation trustees can choose to treat all of the fund’s assets as not being segregated current pension assets for an income year if all of the fund’s assets are held solely to discharge liabilities in relation to retirement phase interests for part of that income year,” Accurium said.

“That is, where the fund has a period of ‘deemed segregation’ and does not have DSFA, the trustee can choose to treat all of the fund’s assets, held during this period, as not being segregated current pension assets.

“This is a positive change from the original exposure draft legislation where it appeared that trustees had to make a choice in relation to each and every asset held during a period of ‘deemed segregation’ as to whether they were to be or not to be treated as a segregated current pension asset.

Under the bill, Accurium noted all assets held during a period of ‘deemed segregation’ will be segregated current pension assets, unless the trustee chooses for all of them not to be, that is, there is only a requirement to make a choice where the trustee does not want assets held during a period of ‘deemed segregation’ to be segregated current pension assets.

Further, making the choice apply to all assets held during the ‘deemed segregation period’, rather than each individual asset, is also a positive outcome.

“This ECPI calculation choice measure has two exceptions. Where all of the fund’s superannuation interests are in the retirement phase for all of the income year, the fund is unable to make the choice not to treat fund assets as segregated current pension assets,” Accurium explained.

“That is, the fund will use the segregated method to claim ECPI. There should be no issue with this exception as it results in the same outcome – 100 per cent of the eligible income claimed as ECPI.

“Furthermore, if the fund has DSFA, it is precluded from using the segregated method, and therefore there is no choice to make. The fund must use the proportionate method for the entire income year to calculate and claim ECPI.

“Just note the change from 1 July 2021 to remove the requirement for SMSFs and small APRA funds to obtain an actuarial certificate when calculating ECPI, where all members of the fund are fully in retirement phase for all of the income year. These funds are permitted to use the segregated method to calculate ECPI, despite having DSFA.”

By choosing to treat an SMSF’s assets as not being segregated current pension assets, during a period of “deemed segregation”, a trustee can use the proportionate method when calculating all of the fund’s ECPI for the entire income year. Accurium said it is expected that allowing this choice will minimise the complexity for trustees and reduce the associated reporting costs for funds. In effect, this allows trustees to apply the pre-2017-18 industry approach to calculating and claiming ECPI.

In relation to the SMSF trustee making the choice, the Explanatory Memorandum (EM) to the bill states that trustees will choose which method to use and calculate ECPI before submitting the fund’s SMSF annual return, according to Accurium.

“This choice is not a formal election and does not have to be submitted to the ATO. However, it is expected that trustees will keep a record of any choice they make and the details of the calculation they use,” Accurium explained.

“It appears that effectively, SMSF trustees will be able to make their choice of the ECPI calculation method on a retrospective basis, that is, as part of the preparation of the annual financial statements and SMSF annual return.

“If the trustee for an eligible fund does not make a choice then, consistent with the ATO’s current view on the application of the existing law, the fund’s ECPI will be calculated using the segregated method for any period (less than the whole income year) of ‘deemed segregation’, provided it does not have DSFA.

“In practice, an SMSF will only be able to exercise this choice if all of the interests in the SMSF are in retirement phase for some, but not all of the income year along with all of the income derived from the SMSF’s assets is supporting retirement phase income stream benefits payable from an allocated pension, market-linked pension or an account-based pension, and the SMSF does not have ‘disregarded small fund assets.”

Source: SMSF Adviser

Self-managed super attracts new members seeking tax benefits

Nobody wants to pay a $150,000 + tax bill if they can avoid it, but this is becoming increasingly common among property investors, and is one of the reasons why more Australians are starting self-managed superannuation funds – including a rising number of people aged under 40.

SMSFs are a legal way to avoid paying hundreds of thousands of dollars in capital gains tax, but industry experts warn people to beware of property spruikers operating in this space.

New data from the Australian Taxation Office shows SMSF member numbers have grown at their fastest rate in five years, with 43,000 more people signing up in 2020-21 to take the total past 1.11 million.

SMSFs require more work than many super fund members are comfortable with, but offer more choice, control and potentially huge tax benefits.

Let’s crunch the numbers. If a median-priced property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000.

But if that property is held in a SMSF member in retirement, Australia’s superannuation rules cut the CGT to zero after age 60.

These generous tax rules also apply for shares, cryptocurrencies and other investments.

SMSF Association CEO John Maroney says self-managed super funds can now have six members, following rule changes in July, and can become a lifetime family savings vehicle.

Business owners are big users of SMSFs, but Maroney says “it’s got to be part of your strategy, not just because other small businesses or friends at a barbecue are doing it”.

He says renewed interest in SMSFs reflects greater interest in super since Covid hit, and younger people having bigger super balances thanks to years of compulsory employer contributions.

“It’s the cheapest option once you get to a certain size,” he says.

The SMSF Association says combined assets of $200,000 can make running costs comparable with other forms of super, while others say balances above $500,000 are preferred.

You can borrow money within a SMSF to invest in real estate, but beware of property spruikers who overemphasise the benefits of this.

“We encourage people to get professional advice from someone who doesn’t have a financial interest in selling the property,” Maroney says.

“You would need to think carefully about setting up a self-managed super fund just to finance the property side.”

SMSF Loan Experts managing director Yannick Ieko says the costs of borrowing within super to buy property have been dropping, and he is seeing more people aged under 40 set up SMSFs.

“You have the freedom to manage things yourself or appoint a professional to assist you,” he says.

“You have complete control over your own super.”

Big banks stopped providing SMSF loans in 2018, but current lenders include Bank of Queensland, La Trobe Financial and Reduce Home Loans, with rates as low as 3.6 per cent.

Paul Dugdale, 39, and wife Kat, 36, set up their SMSF for several years ago to invest in residential and commercial real estate.

“Our annual concessional super contributions, together with the incoming rent from tenants, means that our mortgages can be reduced at a rapid rate and our properties are cashflow positive,” Dugdale says.

“We can also invest in shares and other assets to diversify our portfolio risk.

“Running a SMSF certainly takes more time and effort than an industry super fund and SMSFs definitely aren’t for everyone.”



• Control where your money is invested.

• Ability to invest in property directly.

• Lower costs when SMSF expenses are spread over bigger balances.

• Lower taxes while saving, and no tax in retirement.

• Can borrow to invest.


• Managing a SMSF can be time-consuming.

• A high level of financial literacy is required.

• Auditing, insurance and other costs must be managed.

• No government protection if money is lost through fraud or theft.

• Complexities around maintaining or selling property.

Written by Anthony Keane, Personal Finance Writer. 
Published in The Australian, 13th September 2021
Source: SMSF Association

SMSFs getting increasingly comfortable with crypto

SMSFs have now seen an over 90 per cent increase in cryptocurrency trading across the year, with advisers urged to start getting acquainted with crypto as it becomes a growing alternative asset for clients, according to a report.

The BTC Markets’ Investor Study Report 20-21 has unveiled the data analysis of the crypto exchange platform’s 325,000 users to explore the “what’s” and “why’s” of their crypto investments.

Findings from the report found that the growth of SMSFs trading on the BTCM exchange during FY20-21 rose by 95 per cent.

Based on the data, there has been increased demand from SMSF investors driving crypto investment in a rapidly maturing market.

“We have noticed that SMSF investors are comfortable making significant purchases outside of the more well-known cryptocurrencies into projects such as Ethereum Classic (ETC) and Bitcoin Satoshi Vision (BSV) – indicating their confidence and commitment to research,” BTC Markets CEO Caroline Bowler said.

“Further, companies that invest and trade with us are generally in the small to medium-sized enterprise category and are invariably organisations where the founder is still involved.

“This is interesting because founders and entrepreneurs usually have a healthy appetite for risk and tend to be nimbler when it comes to decision-making – a trait that is beneficial for investing in crypto given its dynamic nature.

This result also indicates a longer-term investment timeline whereby Australians are looking to cryptocurrency to build and provide for their future, rather than using it as a “get rich quick” investment, according to Ms Bowler.

“It’s worth noting that cryptocurrency investments are being used for overall portfolio diversification. This is a role traditionally held by alternative assets such as REITs, hedge funds, art, precious metals such as gold, and other collectibles,” she noted.

“This indicates that cryptocurrencies are coming of age in playing an increasingly important role as an alternative asset in the portfolio construction process.”

Looking forward, BTCM said it expects more companies to follow suit in adding digital assets to their balance sheets, whether as a natural hedge against fluctuating fiat currencies or as part of a corporate strategy to embrace modern, open technologies.

Ms Bowler believes there is a clear avenue for SMSF accountants, financial advisers, tax lawyers and to lift their game in getting acquainted with the nuances of crypto, not only for their own business but also for their clients.

Nearly a quarter (23 per cent) of investors surveyed cited cryptocurrency as the only investment they held and 63 per cent were not deterred by its volatility, rather embracing it as a “risk they understood.”

“In order to stay relevant to this investing cohort, it is time for professional services to catch up with the comfort levels of these investors, rather than waiting for them to be convinced of the benefits of more traditional investment assets,” she stated.

While financial advisers may be investing in digital assets in a personal capacity, regulation prevents them from supporting their clients who are doing the same, as cryptocurrency is not considered a financial product in Australia.

“This lack of professional financial advice can be conducive to investors falling prey to unscrupulous scams and ‘finfluencers’ if they don’t do their due diligence.

“Further building the case for regulation of cryptocurrency in Australia, 28 per cent of respondents said that a lack of regulation was a challenge when investing, while 32 per cent said a lack of understanding on the tax treatment of crypto investment was a hindrance.”

Once crypto becomes a regulated financial instrument, which is currently being addressed by Senator Andrew Bragg’s select committee, Ms Bowler said investors and their advisers would likely gain greater confidence about operating in the crypto sector.

“In the meantime, educating professional services will be crucial,” she concluded.

However, this comes as the ATO had recently fired warning shots for advisers new to cryptocurrencies to be aware of the components that comprise a crypto asset’s cost base, and to encourage their clients to keep immaculate records.

Speaking at a cryptocurrency forum hosted by the Knowledge Shop on Tuesday, ATO assistant commissioner Adam O’Grady stressed the importance of “getting the cost base right,” which he said has emerged as a leading pain point in the tax treatment of cryptocurrencies.

One often overlooked element of a crypto asset’s cost base, Mr O’Grady said, are instances where an investor has borrowed money to invest in cryptocurrency.

“Generally, that is actually part of the cost base,” he said. “Unlike shares that are earning dividends on the way, those interest expenses may be claimable immediately as a deduction in the cryptocurrency space.”

“Because they’re generally not earning income alone, it does actually form part of the cost base.

“But a lot of other cost base elements such as your brokerage fees, or transfer costs, all those sorts of things are ones that you’d be familiar with.”

Source: SMSF Adviser

ATO Quarterly Statistical Report

The ATO has released the June 2021 quarterly statistical report revealing the total estimated assets of SMSFs have reached just over $822 billion, along with a record growth trend in establishments seen across the year.

The ATO has released its Self-managed super fund quarterly statistical report – June 2021, revealing the latest statistics on the SMSF sector.

The report shows that there are now approximately 597,900 SMSFs and an estimated 1,114,529 members. These figures point to increased growth in total fund numbers, which have increased to 4 per cent from the last financial year, compared with the yearly average of around 2 per cent each year over the last five years.

The total estimated assets of SMSFs increased from $787 billion in the March 2021 quarter to just over $822 billion in June 2021. The top asset types held by SMSFs (by value) are listed shares (28 per cent of total estimated SMSF assets) and cash and term deposits (18 per cent). 


This 2020-21 financial year saw more than 25,312 new SMSF establishments showing continued growth compared with previous years, while wind-ups have also hit record lows with 2,187 recorded, around an 80 per cent drop from previous year averages. 

Fifty-three per cent of SMSF members are male and 47 per cent are female, while 86 per cent of all SMSF members are 45 years or older.

Individuals aged 35 to 44 continue to make up the majority of most of the new establishments and have now risen to 10.7 per cent in total age distribution of members in SMSFs as at the end of June 2021.

The average assets per SMSF member were $696,000 and the average assets per SMSF were $1.3 million. The median assets per member was around $414,912, while the median assets per SMSF had increased up to $733,926. 

Meanwhile, member contributions into SMSFs were up to $12.6 billion, while employer contributions into SMSFs were around $5.4 billion.

A more detailed overview of the ATO statistical report can be found here.

Source: SMSF Adviser

SuperStream rollover events clarified

The ATO has released examples of rollover events to support SMSF trustees in adhering to the SuperStream rules set to take effect from 1 October.

In a website update, the regulator outlined the circumstances where a trustee or authorised agent will be required to process fund rollovers using the new service.

Family businesses within a fund will be among those not required to send contributions via SuperStream due to the link of ownership between the appropriate business and membership, which meets the related-party exemption.

However, funds that involve a self-employed member in a fund that also includes family members working for non-related employers will need to use SuperStream to gain access to employer contributions.

SMSF members initiating a rollover request from an Australian Prudential Regulation Authority fund will need to request the transfer using the service from 1 October, as will trustees rolling out any member funds or winding up an SMSF after that date.

“From 1 October 2021, where your SMSF cannot interact via SuperStream, you cannot roll money out of your SMSF, including at wind up,” the ATO said.

It noted SuperStream will be a faster service for funds seeking to release excess contributions, but use of the service is not mandatory in this circumstance.

In addition, it warned funds to ensure their SMSF messaging provider allows SuperStream rollovers and to inform the ATO if they change providers.

In a separate update, the ATO stated all contributions made by a SuperStream rollover had to be reported during the financial year via the SMSF annual return and funds were also required to complete a transfer balance account report to report the debit that arises in the member’s transfer balance account if they commute a retirement-phase income stream before rolling over the assets.

Source: smsmagazine.com.au

SMSF trustees warned on increasing exposure to compliance risks affecting collectables

SMSFs can be increasingly exposed to various compliance risks surrounding collectables, as the asset class requires continued consideration of administrative impacts on the fund.

In a recent update, an SMSF expert said that, since 2016, when the full implementation of the restrictive rules surrounding SMSF investments in collectables commenced, there has been a marked reduction in the number of funds holding this class of investment.

“We are now seeing some increased exposure as trustees look for alternative investment options, but I suspect that many are not also considering the restrictions and ongoing administrative ramifications involved,” he said.

Collectables and personal-use assets include artwork, jewellery, antiques, artefacts, coins, stamps, books, memorabilia, wine, cars, bikes, recreational boats and club memberships. Bullion is not included as its value is based on intrinsic weight and purity.

Mr Busoli noted collectables can’t be leased or used by a related party or stored in a private residence of a related party. Funds can only lease them to unrelated parties, so the SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms.

“If the SMSF owns a vintage car, related parties can’t drive it for any reason — not even for maintenance purposes or to have restoration work done — because this constitutes use of the asset,” he explained.

“Storage must be remote from the trustee’s private residence which includes any part of the land on which it’s situated. So, a vintage car cannot be stored in a purpose-built shed, and a record must be kept of the reasons for deciding where to store the items.”

They must also be insured in the name of the fund. If they constitute only a part of a policy held by another party, they must be specified, and the fund must be noted as the owner and beneficiary. If the fund is unable to insure them appropriately, they must be disposed of.

“Collectables and personal-use assets can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer, which is a more onerous requirement than for other asset classes,” he explained.

“I suspect that trustees will be less inclined to want to participate in this class of investment when made aware of the rules.”

Source: SMSF Adviser

Covenant pointless for SMSFs?

The imposition of a retirement income strategy on SMSFs under a new covenant will not create any benefit to funds members, but rather generate further costs undermining the intent of the strategy, a legal firm has warned.

Townsend Business and Corporate Lawyers said the federal government’s proposal for every superannuation fund to have a retirement income strategy under the Retirement Income Covenant would be unsuitable for SMSFs, which were only likely to pay it lip service.

The legal firm made the claim in a submission to Treasury in response to a position paper released by Superannuation, Financial Services and the Digital Economy Minister Jane Hume.

The paper stated the covenant will impose a duty for super fund trustees to develop and document a strategy to assist retirement or near retirement age members to maximise their retirement income, manage risks to the sustainability and stability of their retirement income and to provide flexibility in accessing super savings during their retirement.

In claiming the covenant and strategy would not generate any practical benefit to SMSF members, the law firm pointed out limited retirement income options were available to an SMSF.

“The only retirement income stream product which can be issued by SMSFs are account-based pensions,” it said.

“The only means of increasing retirement income is to dial up the pace of capital consumption or the adoption of investment strategies involving greater investment returns at the cost of higher increased investment risk.

“There is no scope for augmenting pension capital by the trustee issuing some form of pooled income stream product – as the membership base of SMSFs is too small for pooled products.”

It added that because pooled retirement income products were unavailable to SMSFs, they operated in a different way to non-SMSFs in ensuring retirement income was sustainable over the long term.

“Longevity risk can only be managed by moderating the pension drawdown rate; investment risk can only be moderated by a weighting towards defensive assets as against growth assets; and selection risk can only be moderated by having a cash component sufficient to support one or two years’ pension payments,” it said.

“The member could purchase, from a third party, a lifetime income stream. However, this is a decision best left to the individual member and their willingness to accept the significant capital cost of such guarantees.

“Finally, it should be noted that the current regulatory design features of account-based pensions are at cross purposes with the sustainability and stability goal set out in the paper and, also, the retirement consumption pattern noted in the Retirement Income Review.

“The age-related and increasing minimum drawdown requirement undermines management of the longevity risk and the requirement to make pension payments in cash rather than in specie asset transfers increases both investment and selection risks.”

It said given these limitations with SMSFs, and the small size of the membership of most funds, there was no scale within the funds for the expense of implementing a strategy on each member’s retirement savings.

“Compliance with the RI (Retirement Income) Covenant will be formalistic at best and the regulator will be required to challenge the performance of the RI Covenant, which will be beyond the regulator’s resources and skills,” it added

Source: smsmagazine.com.au

SMSF Association urges rethink on NALE

The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down last week.

Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”

“Today’s ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

“This means situations could arise where an SMSF, which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.

“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”

Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur on arm’s length terms.

“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate.”

On a positive note, the ruling does provide several examples of situations where the trustee provides a service to their own fund for no charge that does not result in NALE.

“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service.

“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.

“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.

“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business”,

“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI,” Burgess says.

Source: SMSF Association