Identifying when a scheme will be caught by the new non-arm’s length expenditure rules
Broadly, determining whether the new non-arm’s length expenditure rules will trigger the application of the NALI provisions will require consideration of the following:
- Identify that there is a ‘scheme’, which is defined in S.995-1(1) as “any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise”. This is a very broad definition that could include a large number of transactions or arrangements (formal or informal) entered into by an SMSF, including (but not limited to):
- engaging another party to perform a service;
- acquiring an asset from another party; and
- entering into a contract or other undertaking with another party (e.g., entering into an LRBA with the other party).
While a scheme can be undertaken by a single party, the NALI provisions involve dealings between at least two parties, or a party acting in more than one capacity (e.g., the trustee of an SMSF).
- The parties to the scheme are not dealing with each other at arm’s length. Note that the concept of ‘non-arm’s length’ takes its ordinary meaning and is not restricted to dealings with parties that are ‘associates’ (for income tax purposes) or ‘related parties’ (for SIS purposes). For example, a scheme that involves an SMSF dealing with a fund member’s friend or work colleague may potentially be caught under the NALI provisions.