The SMSF Association has reiterated its call for the non-arm’s-length expenditure (NALE) provisions to be repealed, noting the current draft legislation is unnecessary and does not address the issue of general expenses of a capital nature and specific expenses.
In a submission to Treasury as part of the consultation on implementing changes to the Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds announced in the budget, the association stated the wider NALE framework was unsuitable and created a range of unintended consequences and they, and NALE breaches, could be addressed by repealing 2019 amendments to the Income Tax Assessment Act 1997.
Pointing to the original intent in the 2019 amendments of dealing with zero interest related-party limited recourse borrowing arrangements (LRBA), it noted Practical Compliance Guideline (PCG) 2016/5 and the safe harbour terms for arm’s-length dealings had achieved the objective of ensuring related-party LRBAs were conducted on arm’s-length terms.
“Arrangements outside the commissioner’s guidelines that do not sufficiently and appropriately substantiate an arm’s-length arrangement will result in the application of non-arm’s-length income (NALI). PCG 2016/5 has been very successful in achieving its objectives and the desired compliance outcomes,” the submission stated.
“The desire to proceed with the 2019 amendments and continued amendments to these provisions mean unintended outcomes persist. Noting further changes will be needed to address the outstanding operative issues and concerns.”
One of these outstanding issues is general expenses that are capital in nature and may expose all of a fund’s income to NALI tax.
“Expenses such as a deed update may be either revenue or capital in nature. Broadly, what would be an immaterial and relatively small cost forgone to the fund could result in all the fund income being taxed as NALI at 45 per cent,” the submission said.
It also noted the consultation and proposed amendments did not address specific expenses in regards to NALI where a small capital expense can taint the entire capital gain derived by the fund when the asset to which the specific NALE relates is eventually sold.
“This will have retrospective application when we consider the accrued capital gains over the life of the asset prior to the incurrence of the expense. Further, it risks tainting gains accrued prior to the introduction of the NALE provisions,” it said.
“A method that allows for a proportionate approach to be taken must be considered where the non-arm’s-length element represents only a part of the overall value.”
The association said the proposed amendments were an improvement on the current law and broke the nexus between general NALE and income derived by a fund, but the related issues had to be addressed if the current amendments were to proceed.
“Should the 2019 NALE amendments not be repealed for all funds, and the government proceeds with the proposed amendments, it will be critically important that the proposed amendments are broadened to address disproportionate outcomes arising from specific NALE and general NALE which is capital in nature, and inconsistencies in the way the CGT (capital gains tax) provisions interact with NALI,” it said.
