The link between non-arm’s-length expenditure (NALE) and the income of an SMSF needs to be broken to ensure the NALE provisions work as intended, with pending amendments to contribution rules offering a potential way forward, according to the SMSF Association.
SMSF Association deputy chief executive and policy and education director Peter Burgess said while the government had announced it will address concerns around the application of NALE, it had not put forward any solutions, but a collective of industry bodies had created a potential way forward.
Speaking at the SMSF Association National Conference in Adelaide today, Burgess said the bodies had proposed the use of a proportionate approach, which recognised the difference between NALE transactions and other income in the SMSF.
“We need to break this link between the NALE and the fund income which gives rise to disproportionate outcomes,” he said, adding any penalties should only be applied to the arm’s-length shortfall amount.
“This is the difference between what’s charged and what should have been charged at an arm’s-length rate. The penalty should just be applied to that, not to all the income the fund receives.
“How could you apply a penalty? Treat it as an excess concessional contribution is one way as it will eventually find its way out of the fund and that breaks that link.”
He added that alongside the breaking of the link there should also be the ability to rectify honest or inadvertent errors and to only apply the NALE amendments from the date they started on 1 July 2018.
There had been no feedback from the government and Treasury as to whether they were making these changes, he said, but the solution being presented by the industry bodies would allow the tax commissioner to make the required determinations.
“We do know the ATO is currently amending contribution ruling TR 2010/1 to bring it up to date with the changes announced last year,” he said.
“So, given we are saying the ATO can deal with the penalty as an excess contribution, perhaps the solution is in the amendments they make to that ruling.”