The federal government has proposed a method for addressing non-arm’s-length expenditure (NALE) for general expenses for an SMSF that will prevent all of the income of the fund being taxed at 45 per cent and is seeking industry feedback on the proposal.
Assistant Treasurer and Financial Services Minister Stephen Jones announced the release of a consultation paper that contains proposals to amend the non-arm’s-length income (NALI) provisions and deal with NALE by ring-fencing general expenses within an SMSF or small Australian Prudential Regulation Authority (APRA) fund (SAF).
“While the NALI provisions are operating broadly as intended, the government appreciates some superannuation industry stakeholders have raised the potential for disproportionately severe outcomes for breaches relating to general expenses,” Jones said.
“For the purposes of stakeholder consultation, Treasury has developed potential policy changes to the NALI provisions, where they relate to general expenses which have a sufficient nexus to all ordinary and statutory income derived by the fund.”
The approach put forward in the consultation paper proposes that SMSFs and SAFs would be subject to a factor-based approach, which would set an upper limit on the amount of fund income taxable as NALI due to a general expenses breach.
“The maximum amount of fund income taxable at the highest marginal rate would be five times the level of the general expenditure breach, calculated as the difference between the amount that would have been charged as an arm’s-length expense and the amount that was actually charged to the fund,” the paper stated.
“Where the product of five times the breach is greater than all fund income, all fund income will be taxed at the highest marginal rate.”
The paper noted the amendments would maintain the disincentive for SMSFs and SAFs to use non-arm’s-length arrangements to side-step contribution caps as they would be better off complying with NALI rules, while any adverse tax outcomes for a general expenses breach are proportional to the level of artificial benefit created by the breach.
It also proposed that large APRA-regulated funds would be exempt from the NALI provisions for general expenses.
“This policy approach would be intended to lower the compliance burden for large APRA-regulated funds as there is a lower level of tax integrity concern for non-arm’s-length arrangements involving general expenses for these funds,” it stated.
“For all funds, where a NALE is related to a specific asset, the current NALI rules would continue to apply, such that all the income of that asset will be NALI and subject to the highest marginal tax rate.
“This is in line with the original intent of the NALI provisions to disincentivise non-arm’s-length transactions that artificially inflate the earnings of the fund.”
The closing date for the consultation is 21 February and the paper stated the proposals do “not represent a settled position of the government”, but “provide a greater level of certainty to trustees ahead of the expiry of the transitional compliance approach on 30 June 2023”.
