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ATO clarifies tax rules for NALI expenditure

ATO ruling NALI expenditure

The ATO has released a new ruling outlining proposed amendments to non-arm’s length income (NALI) expenditure provisions which will apply from 2018 onwards.

The ATO has released a draft law companion ruling (LCR) to clarify the amendments to tax legislation relating to expenditure incurred under non-arm’s length arrangements (NALI).

The ruling, LCR 2019/D3, specifies how the proposed amendments to section 295-550 of the Income Tax Assessment Act 1997 operates “in a scheme where the parties do not deal with each other at arm’s length and the trustee of a complying superannuation entity incurs non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income”.

The ATO highlighted the amendments would only operate in the 2018-19 income year, as well as later income years regardless of whether the scheme in which the parties deal with each other was entered into before 1 July 2018.

“While retaining the existing rules, the proposed amendments remove any ambiguity in the application of the NALI provisions by clarifying their application where a complying superannuation fund incurs a loss, outgoing or expenditure (or does not incur a loss, outgoing or expenditure) in certain circumstances,” it said.

Among the amendments to the non-arm’s length income (NALI) provisions, the regulator pointed out the taxable income of complying super funds was made up of two components, specifically a ‘low tax component’ (taxed at 15 per cent), and a ‘non-arm’s length component’ which (taxed at the top marginal tax rate)

It also highlighted the non-arm’s length component for an income year was the amount of a complying super fund’s NALI less any deductions as long as they were attributable to that income.

“To the extent that the ordinary and statutory income of a complying superannuation fund is NALI, the income is not exempt current pension income,” it said.

In addition, the regulator noted the low tax component of a complying super fund’s taxable income was the remaining amount taxable income after deducting the non-arm’s length component.

It further specified the relevant existing NALI provisions would apply where a complying super fund derived ordinary or statutory income under a scheme where the parties were not dealing with each other at arm’s length in relation to the scheme, and the amount of income was more than what might have been expected to have been derived if those parties had been dealing with each other at arm’s length in relation to the scheme.

The regulator added relevant existing NALI provisions would also apply where a complying super fund derived income as a beneficiary of a trust through holding a fixed entitlement to the income of the trust where:

  • the fund acquired the entitlement under a scheme, or the income was derived under a scheme, the parties to which were not dealing with each other at arm’s length, and
  • the amount of income was more than what might have been expected to have been derived if those parties had been dealing with each other at arm’s length.

The ruling was anticipated in some parts of the SMSF sector after it had lapsed before the May 2019 federal election.

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