A new law outlining how the ATO will treat non-arm’s-length expenditure (NALE) is an improvement on the previous regime, but clarification is still needed to explain how the rules will operate in several key areas, according to the SMSF Association.
The Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2023 passed through both houses and received royal assent from the Governor-General last week, taking effect from 1 July and being retrospectively applied to 1 July 2018.
SMSF Association head of advocacy and policy Tracey Scotchbrook said while the recently passed law provides clarity on the operation of the NALE rules, it fails to address several issues the professional body has raised with Treasury over the past 18 months.
“[The NALE law] doesn’t address the issues arising for specific fund expenses or the issues that arise around the calculation of capital gains. There’s a misalignment in the operation of the capital gains tax methodology alongside the methodology for calculating fund income, which includes the calculation of NALE,” Scotchbrook noted during a legislative update yesterday.
“We can actually see the tainting of other arm’s-length capital gains because of the way that these methodologies operate and they don’t intersect or talk to one another particularly nicely, which causes us a problem.
“So this is something that we still need a legitimate legislative solution to rectify and to provide important certainty in that space.”
She added a ruling on how the NALE rules interact where a capital gain arises as a result of a non-arm’s-length arrangement may be announced soon.
“Draft Taxation Determination 2023/D1 is listed on the ATO’s advice under consultation webpage [and] this states that it should be finalised as at June 2024. We’ve just slipped past June 2024, so we expect that tax determination to be finalised imminently now that the bill has passed,” she said.
While the association has requested more details on how the law will operate, she acknowledged it is an improvement over both the previous NALE regime and the initial Treasury proposal.
“This bill will provide essential legislative certainty on the treatment of general expenses that are not on arm’s-length terms, for example, things like accounting fees, which are a general fund expense and they don’t necessarily relate to a specific asset within the fund,” she noted.
“These amendments ensure that NALI (non-arm’s-length income) general expenses will not taint the overall income of the fund, instead we’ll have two times the shortfall amount in relation to that non-arm’s-length expenditure that will be calculated for determining the NALI calculation.
“The original approach that was put forward for consultation by Treasury was looking to bring in a five-times shortfall approach. [Treasury] actually listened to our engagement concerns that we raised on that and were able to reduce that down, which is a far better outcome from where we started.”
