NALI/NALE, Regulation, Tax

New NALE rules not needed


The IFPA has suggested the treatment of NALE within SMSFs and small APRA funds can be achieved by using existing rulings and legislation.

The Institute of Financial Professionals Australia (IFPA) has called on the ATO to scrap the proposed non-arm’s-length expenditure (NALE) rules for general expenses and instead review and amend existing legislation to address the issue.

Treasury released a consultation paper in January that specified any SMSFs and small Australian Prudential Regulation Authority (APRA) funds deemed to have breached the NALE rules will have to multiply the market expense shortfall by five and apply a tax rate of 45 per cent to that amount. This methodology will effectively impose a 225 per cent tax rate on certain assets within these types of funds.

“The industry has put forward some pretty good suggestions in terms of what the government could do to fix this NALE issue. Firstly is [not to] legislate this five-times approach – this 225 per cent effective tax rate. Rather an option is to repeal the NALE rules, which came into place from 1 July 2018, and effectively restore them to what that section, 295.550 [of the Income Tax Assessment Act], looked like pre-1 July 2018, which effectively didn’t include the expense element,” IFPA head of superannuation Natasha Panagis told delegates at the industry body’s 2023 conference held in Melbourne last Friday.

In addition to scrapping the NALE provisions, Panagis suggested the matter can be addressed by using existing rulings and legislation governing SMSFs and small APRA funds.

“One of those [items] is dealing with NALE by way of the ATO’s tax ruling on what is a contribution. Now that tax ruling says if a fund incurs an expense, where undercharging or non-charging that amount, [the difference] will be seen as a contribution and treated as a contribution,” she said.

“Alternatively the other option is to deal with the NALE by way of section 109 of the SIS (Superannuation Industry (Supervision)) Act, which requires that all investments are to be made on arm’s-length terms.

“So use [section] 109 and if anything just slightly amend it to ensure that it captures expenditure as well to make sure that all arrangements that trustees enter into are done on an arm’s-length basis.

“So we’ve got those two solutions that already exist that could apply rather than [implement] this 225 per cent effective tax rate.”

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