The draft bill to enable the non-arm’s-length expenditure (NALE) provisions outlined in this year’s budget papers does not adequately address the issue of non-arm’s-length arrangements and only modifies amendments from 2019 that were not fit for purpose at that time, according to a collective of industry bodies.
In a joint submission to the recent consultation on the draft Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds, the five bodies stated they do not endorse the measures in the draft exposure and repeated calls for a repeal of the NALE regime.
The submission, jointly authored by Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, the SMSF Association and the Tax Institute, stated the amendments made to section 295-550 of the Income Tax Assessment Act (ITAA) in 2019 to extend the non-arm’s-length income (NALI) provisions to address NALE incurred by a superannuation fund were flawed at the time and misunderstood in the formation of the new draft bill.
“Originally, the NALI policy was aimed at imposing income tax penalties on superannuation funds involved in non-arm’s-length transactions,” it stated.
“Its intention was not to bypass the contribution caps, as suggested in the Treasury consultation paper released in January this year. Nor was its intention to allow superannuation fund members to breach their transfer balance cap.
“We consider that the 2019 amendments that introduced the NALE provisions, and the proposed amendments in the exposure draft, fail to meet the original purpose, the new purpose and the principles of good law design.
“Further, arrangements that undermine the integrity of the system (or any perceived mischief) have not been sufficiently articulated, nor has it been quantified in publicly available data.”
It noted the draft bill did not address specific expenses and expenses of a capital nature in its ‘two-times multiple’ model and created a two-tier superannuation system by exempting Australian Prudential Regulation Authority (APRA)-regulated funds from the NALE provisions.
“By exempting large APRA-regulated funds from both general and specific expenses within the NALI/E regime, a tax differential is created, resulting in different treatment for different types of superannuation funds,” it said.
“This differential treatment raises questions as the trustees of these funds are subject to the same statutory best financial interests duty, common law fiduciary obligations and the sole purpose test, making the discrepancy in treatment questionable.”
The joint submission also supported a view put forward by the SMSF Association and Institute of Financial Professionals Australia in their submissions that the 2019 NALE amendments should be repealed and NALI and NALE dealt with under section 109 of the ITAA and Taxation Ruling 2010/1.
