NALE fix involves fair value proof

NALE market value expenses

The government’s draft bill to implement a NALE tax regime will force SMSFs to prove their expenses are at market value.

SMSFs will be forced to prove all their expenses are at market rates to avoid being saddled with non-arm’s-length expenditure (NALE) tax, an outcome that may be difficult to achieve, according to the Institute of Financial Professionals Australia (IFPA).

The industry body made the claim as part of its submission to Treasury during the recent consultation on the draft Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds, which would implement the NALE changes proposed in the budget.

IFPA head of superannuation and financial services Natasha Panagis said the factor-based approach outlined in the draft bill was not the best way to deal with NALE and shifted the task of deciding what was a market rate wholly onto SMSF trustees and members.

“Under this proposal, small funds will still have the obligation to prove all their expenses are at market rates or pay extra tax,” Panagis said.

“As a result, SMSF trustees will be required to obtain benchmark evidence to prove that the amounts to be charged, or that the amount paid to another party, is at arm’s-length/market rates to minimise the risk of the non-arm’s-length income (NALI) provisions applying.

“Identifying whether an expense is NALE may not be a straightforward task as benchmark evidence can be difficult to obtain as expenses/costs can be subjective and can vary widely between providers.”

IFPA board member and chair of its superannuation, technical and policy committee Phil Broderick noted the draft bill also failed to provide consistency between general and specific expenses and the application of the NALI and NALE provisions should be proportionate.

“Rather than using a two-times multiple for general expenses and the existing NALI treatment apply for specific expenses, it is our view that general and specific expenses be treated the same,” Broderick said.

“In particular, we believe the NALI tax rate of 45 per cent should only apply to the amount of underpayment/non-payment of the expense.

“It is also 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.”

IFPA also called for the NALE rules to be removed rather than amended, taking the same position as the SMSF Association, with both bodies noting current tax and superannuation laws were capable of coping with non-arm’s-length dealings inside an SMSF.

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