The federal government’s proposed method to address breaches of the non-arm’s-length expenditure (NALE) provisions by imposing a tax of 225 per cent would create a penalty that is excessive and out of step with tax law, according to two industry bodies.
The Institute of Financial Professionals Australia (IFPA) and SMSF Auditors Association of Australia (SMSFAAA) both noted the proposal to impose a tax penalty using a five times multiple concept created inconsistencies in the treatment of superannuation funds.
IFPA superannuation technical and policy committee chair Phil Broderick said the 225 per cent tax penalty was excessive and would result in disproportionately severe outcomes for breaches of the NALI rules.
“The effective rate of 225 per cent compares unfavourably not only to the penalty tax regime, but also to other anti-avoidance measures, including Part IVA of the Income Tax Assessment Act 1936, the diverted profits tax (40 per cent) and intentional disregard penalties (75 per cent),” Broderick said.
“It’s even greater than one of the highest tax penalties being Part 7 penalties under the superannuation guarantee system for non-lodgement of superannuation guarantee statements (200 per cent).
The SMSFAAA also noted the excessive nature of the proposed NALE penalties in its submission to Treasury on the matter, stating they would set a new standard.
“We believe it is crucial the taxation rules apply consistently across all superannuation sectors and are concerned that progressing with this solution would set a dangerous precedent,” the submission stated.
“It is imperative that the tax outcomes for superannuants be equal no matter which sector of the superannuation industry they choose for their retirement savings. Establishing a difference could lead to confusion, resentment and loss of trust.
“In addition to a different taxation outcome, different systems of taxation legislation could increase the administration burden of SMSFs whilst at the same time reduce the administration burden for APRA (Australian Prudential Regulation Authority)-regulated funds. This could further impact member return differentials between the sectors.”
Broderick called on the government to take a more concentrated approach and target NALE and non-arm’s-length income (NALI) breach penalties to the gains related to the breach.
“It is our strong view that NALI and NALE should be made proportionate – that is, only the additional income (over and above an arm’s-length income) or the underpayment of expenses (that is, below the arm’s-length expense) should be subject to the NALI tax rate of 45 per cent,” he said.
