A technical specialist has suggested the introduction of the bill into parliament enshrining the non-arm’s-length expenditure (NALE) rules into law may indirectly provide SMSF trustees with a legitimate way to avoid being caught by those same provisions.
Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non-arm’s Length Expense Rules for Superannuation Funds was introduced into the federal House of Representatives last week to enact the new NALE rules announced in the 2023/24 budget.
Accurium head of education Mark Ellem noted this legislation in itself would not provide a NALE escape clause, but may do if it interacts with a separate ATO taxation ruling (TR).
“Once this bill is passed, I would expect then that we can have finalisation of the draft consolidation of [TR] 2010/1 and its interesting solution to [some of the previous NALE examples provided by the ATO],” Ellem told attendees of an Accurium TechHub webinar he hosted today.
His reference was to example 9 of Law Companion Ruling 2021/2 Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement. In the second part of this example an asset triggers the NALE rules because the trustee, Trang, used her professional skills to renovate the bathroom and kitchen of the SMSF’s investment property without charging the fund for the work.
This means all rental income from the property and any capital gain from the asset will have tax applied to it at the highest marginal tax rate of 45 per cent as per the non-arm’s-length income rules.
“In the appendix [of TR 2010/1DC], if you look at the contribution ruling, if you improve an asset, the value of the improvement is a contribution. However, one of the questions raised is would we then have a contribution and a NALE problem – a double whammy,” Ellem noted.
“Well the appendix [of TR 2010/1DC] seems to imply that you’ll have one or the other depending on whether you recognise the improvement as contribution.
“So in relation to Trang … if we record the improvement as a contribution, then we may not have non-arm’s-length expenditure. I’m not saying we won’t, that’s my interpretation of the appendix, but we’ll just have to wait and see when this is finalised.”
