NALE fix heavy-handed, unfair

NALE proposal

A government proposal to deal with NALE breaches is excessive and will create an uneven tax environment in superannuation.

The federal government’s proposal to deal with non-arm’s-length expenditure (NALE) breaches is heavy-handed and would create inequitable tax regimes for SMSFs and Australian Prudential Regulation Authority (APRA)-regulated funds, according to the SMSF Association.

SMSF Association deputy chief executive and director of policy and education Peter Burgess said the government’s consideration of options on how to break the link between a general expense breach and the income of a superannuation fund as a whole was welcome, but the application to SMSFs was excessive compared to the breaches and in comparison to APRA-regulated funds.

“Under the current law, imposing a tax penalty on all the fund income can give rise to disproportionally severe outcomes,” Burgess said on the industry body’s website.

“However, the option of including an amount equal to five times the difference between an arm’s-length expense and the expense that was incurred could still give rise to disproportionate outcomes given some general expenditure breaches could be taxed at an effective tax rate of 225 per cent.”

Speaking with selfmanagedsuper, he added the proposed fix was particularly disproportionate if the breach was small and inadvertent and SMSFs had no recourse to address the breach.

“With the five times model there is no ability to fix the breach, particularly where it was a mistake, and there is no capacity to treat the breach as anything else, such as turning it into an excess concessional contribution,” he told selfmanagedsuper.

He added the proposal, which is contained in a consultation paper released this week by Treasury, also represented an unfair tax outcome for SMSFs in comparison to APRA-regulated funds, which will be exempted from the NALE general expenses provisions if the proposals are adopted.

The exemption would be a departure from a long-standing position of tax neutrality across the superannuation industry and would create different tax regimes for different types of funds, he noted.

“We are supportive of APRA-regulated funds being exempted from the NALE general expenses provisions, but would also ask the same for SMSFs if these proposals create unfair outcomes for them,” he said.

“It is not appropriate that there may be different rules for different types of funds. Will it be fair that an APRA-regulated fund member can benefit from a non-arm’s-length arrangement while SMSF members can’t do the same?”

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