ATO’s views on the treatment of ‘general’ expenses sounds alarm bells for accountants continues
Specifically, in paragraph 18 of LCR 2019/D3, the ATO provides the following statement:
“In some instances, the non-arm's length expenditure will have a sufficient nexus to all of the ordinary and/or statutory income derived by the fund”
In such cases, it is the ATO’s initial view that, where an SMSF incurs a general expense on a non- arm’s length basis (or nil expenditure is incurred when it would otherwise be expected), it will cause all of the fund’s income to be NALI. Interestingly, the ATO did not reference the EM to the Bill when making this statement, nor was any case law provided to support its conclusion. Further, this view was not put forward by the ATO in its previous draft ruling on the non-arm’s length expenditure rules (i.e., LCR 2018/D10, now withdrawn).
The ATO’s approach appears to go well beyond the intention of the amendments and could result in grossly disproportionate outcomes for relatively minor matters, as reflected in the following example (which has been adapted from Example 2 of LCR 2019/D3).