The industry has welcomed federal government plans to make amendments non-arm’s-length income (NALI) and expenditure (NALE) rules to ensure they operate as intended, but questions remain as to what this will mean for the SMSF sector.
Superannuation, Financial Services and the Digital Economy Minister Jane Hume yesterday announced the government and Treasury would consult with industry on the appropriate operation of the NALI and NALE provisions following calls that the potential impact of the provisions was too wide-ranging.
SMSF Association deputy chief executive and policy and education director Peter Burgess said the NALE rules went further than intended and could lead to all income of an SMSF being taxed at 45 per cent because a fund failed to incur a small fund expense on arm’s-length terms.
“We understand what these provisions are trying to achieve. However, we have always maintained these new rules should not apply to general fund expenses,” Burgess said.
“We are also concerned about some situations where NALE could give rise to all the income from a particular fund investment, including realised capital gains, being forever tainted as NALI – at the very least trustees should be given an opportunity to rectify the transaction if NALE arose from an inadvertent mistake.”
Chartered Accountants Australia and New Zealand superannuation leader Tony Negline also welcomed the government’s announcement of amendments, noting that since the NALE provisions were first issued in draft format in September 2019, efforts had been made for the law to be restricted to its original intent.
Negline noted changes to section 295-550 of the Income Tax Assessment Act 1997 and ATO Law Companion Ruling 2021/2 forced all super funds to consider if all losses, outgoings and expenditures had occurred on arm’s-length terms.
“There are major consequences for minor errors, which means that solutions would have had to be worked through very carefully requiring considerable time and expertise,” he said.
“The law and ATO ruling has been a dark cloud over the profession’s head who have been waiting with bated breath for the storm.
“This announcement provides an umbrella of hope that there will be more certainty and specific interpretation to these rules for super funds.”
Tax Institute tax policy and advocacy general manager Scott Treatt said Hume’s announcement “addresses an unworkable part of our system and may save working and retired Australians millions”.
“The issue with these rules as they were, was that they were so easy to trigger that every member of every super fund, large and small, was at risk of running afoul of them. Plus, they meant that in some cases we were taxing the retirement savings of Aussie workers at the same rate we tax our highest income earners and at a higher rate than large multinationals,” Treatt said.
Heffron head of SMSF technical and education services Lyn Formica noted that until any proposed changes were on the table it was still uncertain what the announcement means for SMSFs.
“Until we see the amending legislation, it is difficult to know exactly which SMSF arrangements with non-arm’s-length parties will remain caught by the NALE rules,” Formica said.
“However, given the government’s commitment to finding a workable solution whilst still meeting NALI’s policy intent, during the consultation process we would be looking to gain clarity on the types of services which can be provided to SMSFs without triggering a NALI issue.”
She added other areas of interest would include identifying whether the trustees of the unit trusts in which SMSFs invest can provide services to the trust without causing NALI issues for the funds and understanding the ATO’s expectations where SMSFs purchase assets partly for cash and partly in specie, and that penalties for incurring NALE were proportionate to the mischief involved.
