The federal government has released an exposure draft of the bill that will set out how non-arm’s-length expenditure (NALE) will be handled within superannuation funds, including the exemption of Australian Prudential Regulation Authority (APRA)-regulated funds from the NALE provisions.
The exposure draft of Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non-arm’s Length Expense Rules for Superannuation Funds has been released by Treasury for consultation and is consistent with the changes announced in May as part of the 2023/24 budget.
As such, the draft bill contains amendments to the Income Tax Assessment Act 1997 that limit the application of the NALE rules to SMSFs and small APRA funds and make a distinction between what are specific and general expenses for the purposes of NALE rules in regards to general and specific expenses of a fund.
The draft also confirms the non-arm’s-length income (NALI) penalty for NALE relating to general expenditure will be applied to two times the difference between the market rate for the services in question and the amount actually charged to the SMSF.
The exemption to these rules for large APRA-regulated funds, which first appeared in a consultation document in February and were reiterated in the budget documents, was also confirmed in the draft bill.
The SMSF Association stated it would participate in the consultation process, which closes on 7 July, maintaining the changes were unnecessary and NALE was being addressed under existing laws.
“We maintain our view that the NALE rules, which were inserted in the legislation in 2019, should be repealed across the board for all superannuation funds, not just large APRA-regulated funds,” the association stated in a communication to members.
“The mischief that the 2019 amendments sought to address has previously been addressed by ATO contribution ruling TR (Taxation Ruling) 2010/1 and the publication of safe harbour rules for related-party LRBAs.”
It also noted the budget measures do not address the way in which the NALE rules are applied to SMSF-specific expenses, their application to realised capital gains and the inability of SMSF trustees to rectify any NALE breaches.
“Should the NALE rules not be repealed across the board for all superannuation funds, we will continue to advocate for appropriate measures of rectification for SMSF trustees in relation to the application of the NALE rules to specific expenses,” it said.
It also noted with concern the recent news from the ATO that it was developing guidance on how the NALI and capital gains tax provisions interact to determine the amount of statutory income that is taxed as NALI, where a capital gain arises as a result of non-arm’s-length dealings.
“Given the long-standing and significant unresolved issues surrounding SMSFs and NALI, it is with trepidation that we wait to see how the commissioner will interpret the operation of these provisions and what this may mean for other ATO interpretative material that remains under review,” it said.
