The ATO’s release of LCR 2021/2 – which relates to expenditure incurred by superannuation funds under non-arm’s-length arrangements ­– is probably the most concerning tax interpretation ever made by the ATO regarding superannuation funds, says Tax & Super Australia (TSA).

All superannuation fund trustees (from both SMSF and APRA regulated funds) should be very concerned about the significant adverse risks on future member balances this ATO interpretation poses, warns TSA.

Recognising potential impact on millions of ordinary Australians, the ATO included an appendix that sets out a compliance approach. TSA tax counsel John Jeffreys says that the compliance approach may be an attempt to soften the blow of what is seen as a draconian ruling, however, the compliance approach in relation to SMSFs will be meaningless in practise.

For example, the compliance approach states that from 1 July 2022, the ATO will only direct compliance resources in relation to general expenses “…toward ascertaining whether the parties have made a reasonable attempt to determine an arm’s-length expenditure amount for services provided to the fund…”.

The ruling then goes on to note:  “Provided this is the case, the ATO will not allocate compliance resources to determine whether those expenses are in fact arm’s-length expenses”.

“These statements carry with them the implication that ATO auditors will be doing something less than what they would have otherwise done when investigating non-arm’s-length transactions engaged in by a SMSF,” Mr Jeffreys said. “In practice, this will be meaningless.”

This is because, as is current practise, when an ATO auditor investigates a potentially non-arm’s-length purchase by a superannuation fund, the first thing the auditor will ask for is documentation that supports the fact that the transaction is arm’s-length. This will be an identical process to “…ascertaining whether the parties have made a reasonable attempt to determine an arm’s-length expenditure amount”, Mr Jeffreys noted. “There is no difference.”

“It is disappointing that the ATO has maintained its view as to the application of NALE to non-allocated expenses, “Mr Jeffreys added. “In light of this ruling, the key message for all superannuation fund trustees is that they must be careful not to inadvertently acquire anything for less than market value (including acquisitions for no cost). This could increase the tax rate applicable to the superannuation fund, or to parts of the superannuation funds income, to 45%.”