NALI CGT rules a problem for SMSFs


The ATO taxation determination outlining how the NALI and CGT rules interact is potentially problematic for SMSFs.

An SMSF specialist has warned practitioners of the significant problems that exist with the ATO’s draft taxation determination (TD) issued earlier this year that outlines how the non-arm’s-length income (NALI) rules interact with the capital gain tax (CGT) provisions.

Smarter SMSF technical and education manager Tim Miller described TD 2023/D1 as containing “time bombs” for SMSFs due to the formula funds are required to use to calculate the tax payable when a CGT event occurs resulting in a capital gain to an asset that has previously triggered the NALI rules.

“What it does is that it bases NALI on the net capital gain, but when you’re actually [calculating] your NALI component versus your low-rate component of tax, the NALI component doesn’t consider things like discount CGT and carried-forward losses,” Miller told attendees of the ASF Audits Technical Seminar 2023 held in Adelaide recently.

“So there’s a real problem in the way the formula [has been] provided in the law, so we’re not suggesting the way the ATO has interpreted the law is wrong, but it is disproportionate [in nature] because what it’s going to do is apply NALI across the entirety of the net capital gain even if you’ve got non-NALI-based assets in there.”

He acknowledged the SMSF Association has made a submission to the ATO recommending an amendment to the TD to address this issue.

“[The SMSF Association has asked] why can’t the rules provide for proportioning of that net capital gain [in a similar manner] to what [is done when calculating] ECPI (exempt current pension income),” he said.

“I think the SMSF Association’s [suggestion] is well measured and well thought through and we’ll see what the ATO comes back with.

“It’s something we certainly need to be watchful of.”

The opportunity to make submissions in response to the TD closed on 28 July.

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