The addition of rectification provisions to the non-arm’s-length expenditure (NALE) rules is unlikely, with Treasury officials stating their inclusion in the bill before parliament would not discourage tax avoidance.
Treasury’s comments were included in a report tabled by the Senate Economics Legislation Committee examining the contents of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, which recommended the bill be passed with no changes.
The report referenced comments made to the committee by Treasury tax and transfers assistant secretary Adam Hawkins, who outlined the reason why there was no option for rectification in either the bill or wider NALE rules.
“These provisions are anti-avoidance provisions. They are intended to disincentivise the behaviour or the mischief that they’re designed to prevent,” Hawkins told the committee.
“If a trustee had the ability to rectify any non-arms-length expenditure then there would be, in effect, no disincentive for that behaviour.
“It’s appropriate that when the ATO discovers that someone has engaged in non-arms-length expenditure behaviour that a penalty apply in those circumstances and a make-good provision would effectively remove that from the bill.”
He also stated the NALE changes should be introduced as a way of ensuring compliance with expense arrangements was consistent with what is in place in regards to non-arms-length income.
Tax determinations introduced by the ATO in 2016 directly targeted limited recourse borrowing arrangements and “while that may have had an effect on that type of behaviour, other types of behaviour … could also serve to undermine the purpose of the contribution caps. The provisions are still required for that purpose”, he said.
“I note that the non-arms-length income rules, which exist on the income side of the provisions, have existed in some form for about 40 years. The expenditure rules that were introduced in 2019 were intended to provide a mirroring compliance on expenditures as much as it has existed in relation to income for over 40 years,” he said.
The tabling of the committee report has opened passage for the bill into the Senate and as of today the bill has been read a first and second time and without further amendments can be put to a vote to pass it.
