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NALI/NALE

NALI capital gain treatment unclear

NALI capital gain SMSF

The tax treatment of the capital gain associated with an SMSF asset that has been tainted by NALI for only part of its fund life remains unknown.

It remains unclear how the capital gain on an asset that has been tainted under the non-arm’s-length income (NALI) and expenditure (NALE)  rules will be treated for taxation purposes if the circumstances leading to the tax law breach have been rectified during the asset’s life inside an SMSF, a technical manager has said.

SuperConcepts SMSF technical support executive manager Nicholas Ali acknowledged an example of where this type of situation might arise is if an asset is acquired under a limited recourse borrowing arrangement (LRBA) where the terms of the loan are not originally framed on an arm’s-length basis, but are later amended to reflect a legitimate commercial agreement.

“Does this mean, when the asset is sold, the tax treatment will involve a pro rata arrangement whereby it will be taxed for say five years at the penalty rate and then 10 years at the conventional rate?” Ali said during the recent SMSFPD Digital 2021 event hosted by selfmanagedsuper.

“I don’t know the answer and I don’t think anybody knows the answer.”

According to Ali, this kind of scenario encapsulates the problem with the proposed non-arm’s-length expenditure (NALE) provisions in the Income Tax Assessment Act.

“That’s part of the problem. There are all these things that are open ended and that the issue is about what the ATO and Treasury have done,” he said.

“They’ve literally opened a Pandora’s box and people are asking what about this and what about this [and we don’t know the answers].”

Further, he pointed out the nature of the NALE rules could also penalise SMSF trustees who were unaware they were receiving any cost advantage at all until now.

To this end, he noted he found out about a situation where a client only recently discovered they had been receiving a fee discount for the preparation of the SMSF annual return for a number of years, creating the distinct possibility of the fund being penalised under the NALE rules for the entirety of its existence.

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