The federal government’s proposed non-arm’s-length expenditure (NALE) model lacks a basis for imposing a 225 per cent tax penalty and will be difficult for SMSF trustees to implement, according to the Institute of Financial Professionals Australia (IFPA).
IFPA head of superannuation Natasha Panagis said the factor-based penalty was too high and in a recently released consultation paper the government did not present any reason for choosing it.
“When you multiply the [NALE] general expenditure breach by five times, the end result can turn out to be quite excessive and still result in disproportionately severe outcomes for breach of the NALI (non-arm’s-length income) rules,” Panagis told selfmanagedsuper.
“It seems odd that a factor-based method has been put forward. The five times multiple seems to be plucked out of thin air as there is no basis/explanation behind the five times multiple method that has been suggested.
“Rather than apply the NALI tax rate by five times, other options could be considered, such as applying a ‘de minimis’ threshold where the excessive amount, that is the difference between an arm’s-length expense and the expense that was incurred, which is above this threshold is taxed at 45 per cent, rather than taxing the entire difference at an effective tax rate of 225 per cent.”
She said a factor-based method would also introduce further complexities for SMSF practitioners and trustees as the latter will be required to document and self-value any non-arm’s-length expenses.
“I don’t believe the proposed valuation model is workable and will likely mean an increase in costs, both from an administration and auditing point of view,” she said.
“Although SMSF trustees will need to determine an arm’s-length price when applying this calculation method, the ATO may request further information from trustees to support the suitability of the identified arm’s-length price.
“This means trustees will need to obtain a valuation based on objective and supportable data, which is consistent with the current approach to valuations.”
Following the release of the consultation paper, the SMSF Association also voiced its concerns noting there was no provision for an SMSF to make good any breaches of the NALI provisions or treat them as an excess concessional contribution.
