Advisers require more ATO guidance on what are considered to be ‘internal arrangements’ under the proposed new non-arm’s-length income (NALI) rules as they attempt to navigate clients through the uncertainty ahead, according to a lawyer.
Discussing what could be caught by the NALI changes, DBA Lawyers director Dan Butler said the NALI bill before the Senate seeks to “ensure that [funds] cannot circumvent [NALI] rules by entering into schemes involving non-arm’s-length expenditure (including where expenses are not incurred)”.
One of the ways the bill seeks to achieve this is by adding that income is also NALI if “in gaining or producing the income, the [fund] does not incur a loss, outgoing or expenditure that the entity might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme”.
Butler warned advisers need to monitor this because it may cast a wider net, which may impact on clients.
“What about those mums and dads with their rental property, they’re down at Bunnings on the weekend, they get the paint, they’re out there painting the picket fence, they’re fixing up this and that, they’re doing the books of account. Will that sort of activity cause them NALI? And that’s been one of our real concerns for some time,” he told the recent Tax Institute 2018 National Superannuation Conference in Melbourne.
The Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill, which is currently still in the Senate, looks to amend the NALI provisions to ensure complying super entities cannot circumvent the NALI rules by entering into schemes involving non-arm’s-length expenditure, including where expenses are not incurred.
Butler looked to the bill’s explanatory memorandum for guidance on whether the activities mentioned above will result in NALI, and sought clarity on which savings are allowed and what savings will cause the income from the rental property to be regarded as NALI and the net capital gain to be NALI.
“The safety valve under the new NALI rules will not apply to internal arrangements. So it begs the question if this is an internal arrangement, you should be okay to, say, do those internal services,” he said.
“So when do you cross the line from an internal arrangement to becoming an external arrangement? That’s really where we’re going.”
He referred again to the explanatory memorandum, which states “the requirement that parties not be dealing with each other at arm’s length means that the [NALI] rules do not apply in respect of a superannuation entity’s arrangements that are purely internal. This is because an entity’s internal functions are not undertaken with another party on any terms, non-arm’s length or otherwise”.
However, he pointed out other questions remained unanswered, leaving the door open for ambiguity.
“With this concept, are we talking about a contractual arrangement as in there is another party, it’s internal. What if I have a corporate trustee? What if I have a builder that’s incorporated? Why is the director trustee who is the sole proprietor billed? So it’s raising all these concerns which I don’t really have an answer to and I’m just exploring those concerns with you,” he said.