The rules related to non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) can be rewritten to keep their original intent but reduce unintended consequences, according to The Tax Institute, which has put forward a reworked version of the provisions.
The institute stated that following the release of the ATO’s Law Companion Ruling 2021/2 and Practical Compliance Guideline 2020/5 it had become evident the administration of the provisions outlined in section 295-550 of the Income Tax Assessment Act 1997 would be broader than the original policy of preventing circumvention of contribution caps by using NALE to inflate fund income.
“It is our opinion that the provision could, and should, be amended to rectify its scope and application while preserving the original policy intent,” the institute stated in a submission made to Treasury in late December 2021, but only made public earlier this month.
Under the institute’s proposed rewritten provision, the ATO commissioner would make determinations that section 295-550 applied where a member of a superannuation fund enters into a scheme of arrangement where fund income was higher or in producing income the fund’s losses or expenditure were lower than if the parties had been dealing with each other at arm’s length.
“If the commissioner has made a determination that this section applies, he must give a notice to the trustee of that determination and of the difference between the relevant amount (or part thereof) of a transaction and the arm’s-length amount of that transaction (the arm’s-length shortfall amount) (ALSA),” the submission added.
Following this notice, trustees would have 60 days to enter into an arrangement to rectify the transaction so that it reflects the correct arm’s-length amount if it was determined the ALSA was the result of honest or inadvertent error.
Alternatively, trustees could treat the ALSA as an excess concessional contribution of the relevant member and, unless the commissioner was satisfied the amount came from an honest or inadvertent error, they could not claim a deduction for the ALSA.
In the event a trustee fails to advise the commissioner, the latter may choose to make whichever adjustments they deem appropriate, the submission added.
Commenting on this model, the institute stated its reworked model “ensures there is a controlled mechanism to facilitate the rectification of non-arm’s-length dealings where the application of the provisions would otherwise give rise to inappropriate and unintended outcomes”.
“The proposed rectification continues to operate as a disincentive for the targeted non-arm’s-length arrangements,” it said.
“The alternative provisions instead encourage trustees, members and advisers to undertake the proper compliance activities and engage with the commissioner to resolve non-arm’s-length transactions.”
The submission also suggested the institute’s proposed model would benefit from further consultation with other professional bodies to ensure any amended provisions operate as intended, and that 13 organisations had been in contact with Treasury, the ATO and Superannuation, Financial Services and the Digital Economy Minister Jane Hume in regards to changes to the NALE provisions.
