“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,” he said.

“NALE can give rise to a substantial tax liability under the NALI provisions in section 295-550 of the Income Tax Assessment Act 1997 (Cth).”

Butler said that under the current law, an SMSF incurring a general fund expense for things such as accounting or audit services is exposed to non-arm’s length expenditure (NALE). It can also occur where there is a nil expense where an expense should have been incurred if the parties were dealing at arm’s length.

This can result in a 45 per cent 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 per cent NALI tax rate also applies even if an SMSF is in pension or retirement phase 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,” he said.

Butler added that although the ATO’s Practical Compliance Guideline 2020/5 previously provided some relief in the fact that 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,” he said.

“On 13 September 2023, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill (Bill) was introduced, which 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.”

He added this cap is in the form of a maximum cap of two times 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,” he said.

Additionally, Butler said that 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, including employee, director, and shareholder.