New draft NALE/I laws released … highly relevant for property developers and builders

On Monday 19 June 2023, Treasury released an exposure draft to alter the non-arm’s length income (NALI) laws. While a ‘2 multiple’ cap is proposed for certain expenses, the exposure draft legislation — if implemented — could have a significant impact for the SMSF industry. One aspect in particular stands out that is highly relevant to SMSFs utilising the services of related party tradespeople. Namely, an example to the exposure draft states:

[Sam is a related party of an SMSF, whose assets include a rental property.]

… Sam is a licensed builder and blocks time out of their work calendar to conduct renovations on the rental property worth $3,000 for which they charge nothing.

The renovations were an expense incurred in deriving income from a particular asset, the asset being the rental property. The renovations are a specific non-arm’s length expense …

This example, particularly when read in conjunction with paragraphs 22–23 and 69 of Law Companion Ruling LCR 2021/2, suggests that Sam’s work causes:

• in each financial year, the rental income of the property to constitute NALI and
• any net capital gain in a future financial year to constitute NALI.

However, this is not to say that work done by a related party will definitely cause NALI. Rather, great care should be taken when conducting such work in order to be as ‘safe’ as possible and minimise risk. Paragraph 47 of LCR 2021/2 is relevant in this regard.

There have always been tax risks associated with property development and SMSFs. Last week the ATO released Taxpayer Alert TA 2023/2. That Taxpayer Alert discussed diverting profits of a property development project to an SMSF through the use of a special purpose vehicle. That Taxpayer Alert heightened the tax risks associated with property development and SMSFs.

On Friday 23 June 2023, Bryce Figot, Special Counsel of DBA Lawyers will present a webinar discussing the Taxpayer Alert. In the webinar, Bryce will also cover this new exposure draft legislation and how it will impact SMSF property development.

For more details:

• regarding the webinar, visit https://register.gotowebinar.com/register/610544945094534742
• of the exposure draft legislation, visit https://treasury.gov.au/consultation/c2023-408585
• of LCR 2021/2, visit https://www.ato.gov.au/law/view/pdf/pbr/lcr2021-002.pdf

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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.