The SMSF Association welcomes the announcement that the Federal Government will consult with industry on appropriate amendments to the non-arm’s length income (NALI) rules to ensure they operate as intended.
In their current form, the non-arm’s length expenditure (NALE) rules, which took effect on 1 July 2018, could have far-reaching and unjustifiable consequences for superannuation funds, both large and small, says SMSF Association Deputy CEO / Director of Policy & Education, Peter Burgess.
“It’s our considered view that the NALE rules go much further than originally intended. For example, there could be situations where all the income received by an SMSF, including taxable contributions and realised capital gains, is taxed at 45% because the SMSF failed to incur a small fund expense on arm’s length terms.
“There could also be situations where all the income an SMSF receives from a particular investment, including any realised capital gains on selling the investment, is forever tainted as NALI because of a simple oversight.
“We understand what these provisions are trying to achieve. However, we have always maintained these new rules should not apply to general fund expenses.
“We are also concerned about some situations where NALE could give rise to all the income from a particular fund investment, including realised capital gains, being forever tainted as NALI – at the very least trustees should be given an opportunity to rectify the transaction if NALE arose from an inadvertent mistake”.
The ATO has previously stated that if it’s a general expense that is not on arm’s length terms, and it relates to a service that hasn’t been provided by an individual in their capacity as trustee, they will not apply any compliance resources that could cause the fund’s income to be taxed at 45%. However, from 1 July 2022, this concession will only apply where the parties have made a reasonable attempt to determine an arm’s length expenditure amount for services provided to the fund.
Burgess says: “It is unclear what a ‘reasonable attempt’ means and how this should be applied in practice by SMSF trustees and SMSF approved auditors, so we believe a legislative fix is needed and we are pleased the Government is now considering this.”
Although the Federal Government announcement says the legislative changes will apply from 1 July 2022, to avoid any unintended or punitive consequences, Mr Burgess says these changes should apply retrospectively from 1 July 2018.