Addressing the 2022 SMSF Association National Conference, which kicked off at the Adelaide Convention Centre this morning, SMSF Association’s Deputy CEO/Director of Policy & Education, Peter Burgess has taken aim at the non-arm’s length expenditure (NALE) rules in the Income Tax Assessment Act.
Burgess said: “These rules have much broader implications for the entire superannuation sector then was originally intended and, in some circumstances, could result in all of the fund’s income being taxed at 45 percent”.
Prior to the introduction of the NALE rules we were certainty not coming across SMSF members who were undercharging for services provided to their fund as a deliberate strategy to circumvent the contribution caps or to artificially inflate the fund’s investment earnings.”
“So, if we need to have these rules, it is imperative they are appropriately targeted and are fit for purpose,” said Burgess.
“In our view, amendments are needed to exempt general expenses from these provisions, and ensure penalties only apply to expenditure shortfall amounts rather than to some or all of the fund’s income.”
Burgess said it is the linking of the NALE to some or all of the fund’s income, and then applying penalties to that income, that could give rise to inappropriate and poorly targeted outcomes.
“Breaking this link and only penalising the shortfall amount is, in our view, an appropriately targeted legislative response.”
“The penalty could be treating the shortfall amount as a taxable contribution or dealing with it through the contributions regime.”
“So, the solution may well lie in the amendments the ATO are currently making to contribution ruling TR 2010/1, which is now expected to be released in the second half of 2022”, Burgess said.
Burgess noted that the Government has announced plans to amend the NALE rules to ensure they are operated as intended, an announcement which has been welcomed by The SMSF Association.
We were pleased to see this announcement and we look forward to a bipartisan approach to addressing this issue and ensuring the rules work as intended, Burgess said.