The Institute of Financial Professionals (IFPA) has called on the government to scrap the proposed legislation with regard to the non-arm’s length expenditure (NALE) rules for SMSFs and small Australian Prudential Regulation Authority funds (SAF).
The industry body asked for the proposed NALE laws to be abandoned in a submission to the Senate Economics Legislation Committee which is reviewing Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 with the relevant section being Schedule 7.
IFPA superannuation technical and policy committee Phil Broderick stipulated the sector is only opposing the measure in its current form included in the bill.
“Industry is not saying that there should not be an integrity rule, but rather a disproportionate taxing provision (that is, NALE) is not the appropriate way to do it,” Broderick explained.
Instead he pointed out what the government is looking to achieve can be done so via existing legislation and regulations.
“As discussed, industry recommends that the integrity measure be contained in the Superannuation Industry (Supervision) Act 1993 (specifically section 109) and the contribution rules (as per the ATO’s ruling TR 2020/1),” he said.
Further, IFPA stated the proposed legislation will lead to a significant increase in the administration expenses of SMSFs and SAFs due to the need for trustees to benchmark the cost price of commercial transactions involving funds and apply them to related party dealings as well as having to identify the types of services trustees perform for their super funds that would require an associated expense to be recognised.
Broderick also took the opportunity to demonstrate the disproportionate nature of the non-arm’s length income (NALI) and NALE rules when the expense involved is only moderate.
“For example, example 9 in LCR 2021/2 refers to a trustee doing a renovation to an SMSF’s property and not charging for those works. The ATO’s view is that the income and capital gains from the future sale of that property will be taxed at the NALI rates (45 per cent),” he said.
“Let’s say the value of those works that were not charged is $10,000. Let’s also say the future income and capital gains from that property was $1 million. The SMSF will receive a tax bill on that $1 million of $450K. That’s an effective tax rate of 4500 per cent.
“As you can see from the above example, the tax consequences of NALE (and NALI) is disproportionate,” he concluded.