The federal government is re-examining the wide-ranging impact of the application of non-arm’s-length expenditure (NALE) provisions on SMSFs, according to the Tax Institute, which has called for it to offer a solution to the problem.
The institute welcomed comments from Superannuation, Financial Services and the Digital Economy Minister Jane Hume at its recent National Super Conference, where she indicated the government was aware of the issues surrounding NALE.
Responding to a question about the need to fix rules that could expose the entirety of an SMSF’s income to a punitive tax rate due to a nominal discount on an arm’s-length arrangement, Hume said: “We have very much heard your concerns. We know the concerns about the [ATO] commissioner’s ruling and I can assure you … we are looking into your question.”
The Tax Institute said her comments and the government’s commitment to address the issues related to the NALE provisions were pleasing as their application had created “grossly unfair” outcomes for SMSFs.
Institute tax technical and policy director Andrew Mills said a solution was urgently needed as the current NALE rules went beyond rectifying the original integrity concern where an SMSF may benefit from low or no interest loan arrangements from related parties.
“Instead of requiring the fund to pay for these services at market rates, the rules attempted to address this concern by effectively tainting all income related to the discounted services, requiring the fund to pay tax at the top marginal rate on the tainted income,” Mills said.
He said the views expressed by the ATO in its Law Companion Ruling 2021/2 demonstrated how unfair the interpretation of that ruling could be, including the imposition of a 45 per cent tax rate on any future income and capital gains.
“Even the largest funds could see all their income subject to the highest marginal tax rate because of a low-cost or discounted commercial arrangement designed to benefit millions of members,” he said.
“These outcomes are grossly unfair and in dire need of rectification. If we don’t get this right, it could have a hugely detrimental effect on the retirement plans of thousands of Australians, costing billions of dollars and impacting every super fund member’s savings.”
