A specialist SMSF lawyer has identified several changes to the non-arm’s-length expenditure (NALE) rules that may be implemented as a result of the federal government’s review of them based upon positions taken by certain industry stakeholders.
The first involves direct ATO involvement in the application of the provisions.
“There is this idea that we should have the commissioner required to make a determination to employ these provisions to enliven them, rather than them being like a tax revision that self-executes,” DBA Lawyers senior associate Shaun Backhaus said during a webinar last week.
“So [that would be] similar to a Part IVA determination where the commissioner would have to be involved.”
According to Backhaus, changes to the rules for the application of NALE to general expenses could also be reasonably expected due to the disproportionate impact the current interpretation has for all superannuation assets.
“It can have such huge impacts for both SMSFs and in the big APRA (Australian Prudential Regulation Authority) fund sphere. So I expect we’ll [see] something [changing that],” he said.
Lessening the severity of the tax penalty for cases of NALE is a further alteration to the current legislation he suggested might happen.
“There might be something to do with proportionality. At the moment we know it doesn’t matter if [the non-arm’s-length arrangement resulted in] $1 more of income, technically all of the income from that scheme will be taxed at the highest [marginal] rate,” he noted.
“So rather than that, [the amended rules] would look at the difference between what would have happened had [the parties] been dealing at arm’s length [to the actual situation] and that way we would have a proportionate way of dealing with this outcome.
“There [also] might be [some other method] to alter the outcomes so it’s not just straight to the highest [marginal tax] rate [as a penalty]. Maybe [the rules could] look at what might have occurred otherwise.”
He pointed out it would be useful for the inclusion of a rectification measure in the legislation as well.
“When an asset has been infected with the NALE provisions just because of the way it was acquired, it can meant that many, many years later you [will be] dealing with these tax implications from NALE and it would be great if there was some way to recognise maybe the acquisition or transaction wasn’t at arm’s length [and an allowance was made] to fix that up,” he said.
He suggested that could be done by way of an additional tax at the time the original transaction took place.
