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The outcome of the BPFN and Commissioner of Taxation provides the ATO an opportunity to take a more pragmatic approach on non-arm’s length income, says the professional body.
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CA ANZ urges ATO to revise NALI guidance after court decision
17 May 2024
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Chartered Accountants ANZ has urged the ATO to review some of its guidance material relating to non-arm’s length income (NALI) following the AAT decision regarding BPFN and the Commissioner of Taxation.
The case involved the trustee of an SMSF who was the sole unit holder of a unit trust, called JJUT, that had fixed entitlement to distributions under the JJUT trust deed.
Through a series of loan agreements, JJUT lent funds to the entity ABC. ABC then lent funds to the related discretionary trust DEF, and DEF then on lent to unrelated third parties.
DEF entered into several loan agreements with unrelated third parties. It was accepted in the proceedings that these loan agreements were on arm's length terms.
The loan terms from the JJUT unit trust to ABC and from ABC to the discretionary trust DEF outlined that the interest rate would be the same rate that was paid by the third parties to DEF.
The ATO argued that the fact no margin was charged on the interest rates between the various lenders suggested that the scheme would not have been entered into if the parties were dealing at arm’s length. It also submitted that ABC’s fees were unsustainably low.
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The Tax Office submitted that by keeping all of the interest for itself, and paying ABC what it described as unsustainably low fees, the SMSF trustee thereby ensured that it earned more than it would have if the parties were dealing at arm’s length.
The Tribunal concluded that the SMSF trustee had derived no more income than it would have derived had the parties been dealing with each other at arm's length.
Despite the decision being unfavourable to the ATO, the Tax Office said it had no implications on any of its advice or guidance.
In a recent submission, CA ANZ said it believes the decision provides the ATO with the opportunity to take a more pragmatic and commercial approach regarding the matters considered by the Commissioner when forming an opinion about whether income is non-arm’s length income.
“We encourage the ATO to take this opportunity,” the professional body said.
“As a result of the decision, we also recommend that the ATO considers what changes are required to guidance material relating to NALI to reflect the decision.”
CA ANZ said that tax ruling TR2006/7 needs to be updated to reflect the ATO’s approach to the matters it may consider relevant when forming the opinion that income is not NALI in light of the AAT decision.
“Importantly, additional guidance would be beneficial to SMSF trustees and their professional advisers regarding the documentation or other substantiating records that would be required to satisfy the ATO that any arrangements entered into were on a commercial basis and that the income derived was no greater than what would have been derived if the parties involved were dealing with each other at arm’s length,” said CA ANZ.
“Examples of the records that could be retained by trustees could include loan documentation; trustee resolutions; and statements of professional advice, such as legal or accounting advice.”
Beyond the impact of the AAT decision, CA ANZ said additional guidance will be required once the non-arms-length expenditure changes contained in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 become law.
“It would be of great assistance to SMSF trustees and their professional advisers as they navigate these changes if this guidance was also incorporated into the guidance and TR2006/7,” it said.
“Finally, we encourage the development of a law administration practice statement to support and guide ATO staff when determining which matters may be considered when forming the opinion that income is not NALI.”
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