SMSF Staff Discount Policy –– do you have one?

DBA Lawyers is pleased to announce our SMSF Staff Discount Policy. We have been assisting many firms in relation to documenting an appropriate SMSF staff discount policy and providing training in relation to managing non-arm’s length income (NALI) and non-arm’s length expenditure (NALE) issues.

For a recent webinar outlining the issues relating to SMSF discount policies for accounting, financial planning and auditing firms, click here.

Why should my firm have an SMSF staff discount policy?

Broadly, if a firm’s discount policy is not in line with the ATO’s position in Law Companion Ruling LCR 2021/2, this is likely to result in a NALE for any staff member’s SMSF that obtains discounted services. NALE can give rise to a substantial tax liability under the NALI provisions in s 295-550 of the Income Tax Assessment Act 1997 (Cth).

Under current law, an SMSF incurring a general fund expense (eg, for accounting or audit services) that is NALE, or a nil expense where an expense should have been incurred if the parties were dealing at arm’s length, can result in a 45% tax liability, applying to the following financial year of the NALE, on:

• all of the fund’s ordinary income;
• all of the fund’s statutory income (including net capital gains and franking credits); and
• assessable contributions received by the fund.

A 45% NALI tax rate also applies even if an SMSF is in pension or retirement phase.

This outcome is based on the ATO’s view that a lower or nil general fund expense has a sufficient nexus to all of the fund’s income (including both ordinary and statutory income).

Although the ATO’s Practical Compliance Guideline PCG 2020/5 previously provided some relief (ie, the ATO was not applying its compliance resources to general NALE in respect of the 2018-19 to 2022-23 financial years), this transitional compliance approach ceased on 1 July 2023. Accordingly, from 1 July 2023 it is critical that discount arrangements are revised to minimise NALI/E risks.

Proposed NALE changes

On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill (Bill) was introduced. The Bill proposes a cap on the amount of income that will constitute NALI from a non-arm’s length scheme involving a lower or nil general fund expense. This cap is in the form of a maximum cap of two times (2 x) multiple of the amount of the lower general expense for an SMSF or a small APRA fund unless the fund’s actual taxable income is lower.

While this proposed change will reduce the severe impact of NALE for general SMSF expenses, these changes are still to be finalised as law. Accordingly, it is strongly recommended that firms act now to finalise their staff discount arrangements.

DBA service fee information

Our SMSF Staff Discount Policy includes:

• a detailed explanatory letter and checklist;
• a detailed discount policy; and
• a suggested letter to staff notifying them of the policy.

Our fee to prepare an SMSF Staff Discount Policy is $3,500 + GST.

Naturally, we can also be engaged to provide consulting advice in relation to the above, including tailoring the type of services that may be included and excluded from a firm’s policy, as well as training on its implementation.

Further requirements

In accordance with the ATO guidance in paragraph [51] of LCR 2021/2, firms seeking to implement a discount policy should ensure that the discount is consistent with normal commercial practice and that the same discount is applied to each eligible staff category (eg, employee, director, shareholder). Additionally, as there is no express ATO guidance in LCR 2021/2 regarding staff discounts being offered in relation to non-SMSF services (eg, unit trusts or companies that a staff member’s SMSF may be invested in), our staff discount policy is limited to SMSF services only.

Conclusion

Firms offering discounts with a properly documented staff discount policy are exposing themselves and their staff at significant risk. We therefore recommend that an appropriately documented policy be implemented as soon as possible. To place an order for our SMSF Staff Discount Policy, please click here.

Related articles

• SMSF Staff Discount Policy –– do you have one?
• NALE changes introduced as Bill on 13 September 2023
• Firms providing discounted SMSF services to staff need an appropriate discount policy ASAP
• LCR 2021/2 — discounts to SMSFs invoke NALI
• SMSFs, employee share schemes & NALI

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice should be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler ([email protected]), Director, William Fettes ([email protected]), Senior Associate and Fraser Stead ([email protected]) Lawyer

DBA LAWYERS

29 February 2024