Know the difference between general and specific NALE
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Fraser Stead, solicitor with DBA Lawyers, said the new LCR, or updated draft guideline, outlines the proposed changes to the LCR 2021/2 and clarifies the ATO’s view of the amendments to the NALI Act.
“When finalised, the LCR will have effect from 1 July 2018 which is consistent with the act, and it is open for comments and submissions until 24 January,” Stead said.
“This isn't the final product yet, but we will get that hopefully this year, and once it is finalised, it will be binding on the ATO as it's a public ruling.”
Stead continued that one of the first changes in the LCR is subsection 295-550(1)(b), which deals with a lower expense associated with a particular asset or assets of the fund.
“This is what we're going to refer to as specific NALE. The change from the current ruling is contained in paragraph 10 and basically says that in gaining or producing the income of the fund in relation to any particular asset or assets of the fund, the fund incurs a loss, outgoing or expenditure of an amount,” he said.
“It then continues with the normal criteria of NALE that need to apply where you have the scheme, non-arm's length dealing, and the loss, outgoing or expenditure is less than the amount that the fund might have been expected to incur if the parties have been dealing at arm's length.”
He explained this change refers to a specific reference to a particular asset or assets of the fund and is a lower expense, where some kind of expenditure was incurred.
Stead continued that subsection 1C of the LCR covers a nil expense where the fund does not incur any expenditure concerning ordinary or statutory income.
“In this respect, we have the same wording in paragraph 11. This is slightly amended from the LCR from last time, but this is broadly the same,” he said.
The criteria for general NALE is contained in paragraph 11A of the ruling and is newly inserted as subdivision eight was inserted by the NALI Act.
“This deals with a lower expense for general NALE and has the same criteria for a lower expense for specific NALE,” Stead said.
“[The changes in this section state] in ‘gaining or producing the income of the fund, but not in gaining or producing the income in relation to any particular asset or assets of the fund,’ the same flow-on criteria about the loss or outgoing being incurred is less than what would have been incurred on an arm's length basis. This general NALE relates to no particular asset of the fund.”
Stead gave an example of Jane, who prepares and lodges her fund’s financial statements and tax return for the 2024 financial year, using her firm's resources.
“This would be non-arm's length expenditure, and would be a general, non-arm's length expenditure. She has not incurred any expense, so it's a nil expense,” he said.
“Based on this example, this would be covered under subsection nine and is calculated as general NALE using a twice-the-difference approach. If you're looking through the ruling, it's in paragraph 11, the amount of NALE is calculated as twice the difference of the amount, if the amount of the discount of what would have been expected to be incurred if the parties were dealing at arm's length.”
Stead added that the calculation for a lower or a nil expense is slightly different, depending on the kind of expense.
“If it's a lower expense, then it's two times the difference between the market value of the services, less the amount that was actually paid, and if it's a nil expense, it's just two times the full market value.”
Keeli Cambourne
January 10 2025
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