Treasury has revealed the reasons it has rejected industry calls to repeal the non-arm’s-length expenditure (NALE) regime in favour of amendments to the Superannuation Industry (Supervision) (SIS) Act is the super laws are insufficient to address tax advantages for an SMSF stemming from non-arm’s-length dealings.
The government department made the admission as part of an answer to questions on notice directed to it by the Senate Standing Committee on Economics, which is examining the Treasury Laws Amendment (Small Business and Charities and Other Measures) Bill 2023, which contains proposed NALE changes in Schedule 7.
In the response, Treasury stated it had received a joint submission in February from seven industry bodies calling for a complete repeal of the NALE rules and the adoption of provisions in the SIS Act to address NALE arrangements within SMSFs.
“Treasury carefully considered the proposal outlined in the joint submission when providing advice to the government. The joint bodies’ proposal would involve the repeal of anti-avoidance provisions that have been in place since 2019. This presents a number of concerns,” it stated.
The first of these concerns related to the ability to address and unwind non-arm’s-length income (NALI) and NALE arrangements via the Income Tax Assessment Act (ITAA) 1997, which was claimed to be a better vehicle to do so than the SIS Act.
“The NALI and NALE provisions are contained in the ITAA rather than the trustee penalties framework in the SIS Act due to the substantial opportunities for non-arm’s-length dealings to generate illegitimate tax advantages for the fund,” Treasury said.
“Addressing non-arm’s-length arrangements directly through the ITAA allows these illegitimate tax advantages to be unwound by taxing income in future years at the highest marginal tax rate.
“Regulatory consequences under the SIS Act would involve more uncertain outcomes as the tax treatment of the arrangement would not be affected. This may mean a one-off trustee penalty is outweighed by the ongoing benefits from superannuation tax concessions for the rest of the life of the related asset.”
Treasury also noted existing ATO guidance on in-specie contributions was not fit-for-purpose in regard to NALE as in-specie contributions only apply where a shortfall was provided and its purpose was to benefit one or more particular members of the fund or all of the members in general.
“This purpose will not be present in arrangements where an expense is incurred by a fund at below arm’s-length terms, unless there is evidence demonstrating the shortfall was intended to benefit members of the fund,” it said.
“The ATO guidance does not provide funds with a basis to retrospectively treat a NALE shortfall amount as a contribution when that was not the intent of the arrangement.”
Treasury added that any amendments to existing contribution rules to assign NALE shortfall amounts as contributions to particular members would result in ‘complex and burdensome administrative interactions’ between superannuation fund contributions, fund transactions and personal income tax settings and Schedule 7 would be “retained as a targeted and proportionate anti-avoidance measure.”
