The ATO’s position that non-arm’s-length expenses (NALE) would have a nexus to all the income of a superannuation fund is too broad and demands perfection in many fund transactions, three tax and accounting bodies have claimed.
The Institute of Public Accountants, The Tax Institute and Chartered Accountants Australia and New Zealand have called for Law Companion Ruling (LCR) 2021/2 – released yesterday – to be narrowed to reflect the original intent of the non-arm’s-length income (NALI) rules that commenced in 2018.
“At the same time as the whole super sector has been helping Australians navigate their retirement like never before, they’ve been waiting with bated breath for the finalisation of this ruling, which seems to demand perfection,” the three bodies stated.
“The ruling forces all super funds to carefully consider if all losses, outgoings and expenditures have occurred on arm’s-length terms.
“It is concerning that if finance teams, accountants or advisers get any transaction wrong in any super fund, including APRA (Australian Prudential Regulation Authority)-regulated funds, that fund could pay the highest marginal tax rate at 45 per cent on all its income, including realised capital gains.”
The three bodies stated consequences for minor errors were “mammoth” and any actions taken by funds to ensure they were compliant would require more time and expertise.
They added that LCR 2021/2 applied to more circumstances and had a wider impact than the super industry expected compared with original government announcements, and was indicative of how the ATO would enforce the ruling.
“The ruling has opted to show the broad application of these non-arm’s-length rules even to relatively benign situations and the ATO has clearly indicated that it intends to apply a broad interpretation to these rules,” they said.
Echoing comments from the SMSF Association, the three bodies stated they would be asking the regulator for guidance on the application of the LCR and for the government to re-examine the laws behind the ruling.
“The ATO has provided multiple opportunities for professional bodies and the industry to comment on these rulings throughout its development and we look forward to continuing this collaboration with the ATO to investigate how this ruling will apply in practice,” they said.
“We will also work with government to request that these rules be narrowed so that benign or minor expenses cannot create such a disproportionate outcome to a super fund’s tax affairs and in turn severely deplete retirement of Australians.”
