The ATO has released its finalised position on non-arm’s-length income (NALI) and capital gains tax (CGT), making little change to its draft position and retaining the nexus between arm’s-length and non-arm’s-length gains.
The regulator outlined its position in Tax Determination (TD) 2024/5 Income tax: how the non-arm’s-length income and capital gains tax provisions interact to determine the amount of statutory income that is non-arm’s-length income.
The determination was released yesterday and details the interaction between the NALI and CGT provisions in determining the amount of statutory income that will be NALI where a capital gain arises as a result of non-arm’s-length dealings.
The TD stated where a capital gain was the result of a scheme to which the parties were not dealing with each other at arm’s length, that would be NALI under subsection 295-550(1) of the Income Tax Assessment Act 1997.
However, it also stated when calculating any tax payable by a superannuation fund under the rules of that subsection, the methods in subsection 102-5(1) will also be applied in calculating the assessable income and the net capital gain will comprise all arm’s-length and non-arm’s-length capital gains as statutory income.
The SMSF Association responded to the release of TD 2024/5, noting there was a disconnect between the application of the law and the outcomes of the NALI policy.
“While the ATO has finalised its view in accordance with the law, it now means that arm’s-length gains are tainted if there is also a non-arm’s-length capital gain. We do not believe this was ever policy intent,” the association said in a newsletter to members.
The ATO recognised its position differed from that of the superannuation sector and in a Public Advice and Guidance Compendium containing feedback related to the draft determination stated its foremost role was to administer the law.
“We acknowledge this submission that the view proposed in the draft Determination does not reflect how industry considers non-arm’s length capital gains should be treated, notwithstanding that the draft Determination is in accordance with the law as it stands.
“This comment raises issues of policy. We must administer the law as it applies.”
The SMSF Association added it would now continue its NALI advocacy seeking changes via the government.
“Just when we thought most of the non-arm’s-length issues were coming to an end after five years of advocacy, we are now preparing to start targeted advocacy work relating to the interaction between non-arm’s-length income and capital gains tax provisions,” it said.
“We will now advocate for a proportionate approach to non-arm’s-length capital gains, urging the government for legislative amendments that ensure that the non-arm’s-length provisions target only income derived from specific assets.”
