NALI can still taint all fund income

NALE general expenses

It is still possible for the entire income of an SMSF to be taxed at the NALI penalty rate under the NALE bill currently before parliament.

The bill to enshrine the non-arm’s-length expenditure (NALE) rules into law still allows for the possibility of having the entire revenue of an SMSF caught by the non-arm’s-length income (NALI) provisions and subsequently have the highest marginal tax rate applied to it, the SMSF Association has warned.

Speaking at the industry body’s Technical Summit 2023 on the Gold Coast last week, SMSF Association chief executive Peter Burgess noted the draft NALE exposure legislation includes a distinction between general expenses of an income nature and those of a capital nature that could lead to this unwanted outcome.

“It’s not clear to us as to why [the government has] done that, but we are in a situation where this two-time shortfall amount only applies to general expenditure of a revenue account; it doesn’t apply to general expenditure which is on capital account,” Burgess said.

“So what we are left with here is if the fund incurs any general expenses which are of a capital nature, then you’re still at risk of all the income of a fund being taxed as NALE. They are not subject to that two-times multiple.”

He clarified the type of capital expenditure that might come into question under the application of this bill should it pass through parliament.

“Now what’s an example of a general expense that is on capital account [or is] capital in nature? Well there are some examples. There’s trust deed upgrades [and] software licences. [For example], there’s a tax rule that says trust deed upgrades are treated as capital, on capital account,” he pointed out.

“So there are some general expenses that fall into that category.”

According to Burgess, the association has alerted Treasury to this anomaly in its submission regarding the bill, along with its position on the issue.

“We’ve pointed out we don’t understand why they’ve made that distinction and we don’t think it’s necessary because you’d still have a situation where all of the income of the fund could be taxed [under the] NALI [provisions],” he noted.

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