NALE – solving a problem that no longer exists

The Federal Government’s non-arm’s length expenditure (NALE) consultation paper fails to address the problems caused by the 2019 amendments, the SMSF Association’s Deputy CEO / Director of Policy & Education, Peter Burgess, told the National Conference today.

In his address titled What lies BEE-yond the horizon, Burgess urged the Government to repeal the amendments, telling delegates that the consultation paper did not adequately tackle the issues caused by the 2019 amendments and that they were “over-reach”.

“The solution floated in the paper will require SMSF trustees to determine if a general expense has been undercharged and by how much. This may sound like a simple task, but the reality is in a dynamic market like the SMSF sector there can be significant variation in the services provided, particularly when it involves related entities, so determining a ‘market rate’ can be difficult and often subjective.

“There is also the issue that trustees will need to do this even for very small ‘rats and mice’ amounts.

“We also note the potential for a maximum effective tax rate of 225 per cent to be applied to the general expenditure breach. While this is obviously not as severe as taxing all the fund’s income as non-arm’s length income, it is still a punitive and unacceptable outcome.

“We have no issue with the proposal that large APRA funds be carved out of the non-arm’s length income rules that apply to general expenses, but we don’t believe it is fair and reasonable for the same not to apply to SMSFs.

“It is difficult to justify why a member of a large APRA regulated fund can benefit from a reduced administration fee negotiated between the trustee and a related entity, while a member of an SMSF cannot not. We acknowledge SMSF members are in a better position to control or influence the expense arrangements of the fund but, for most, the monetary benefit is still likely to be small.”

Burgess said moving away from the long-established position of tax neutrality between the different superannuation sectors, which would be an outcome of the solution put forward in the consultation paper, was not an appropriate way of addressing the issues caused by the 2019 amendments.

“It’s worth remembering that the original problem that these reforms set out to tackle was zero interest rate Limited Recourse Borrowing Arrangements (LRBAs), and this issue was settled in 2016 when the ATO released their safe harbour parameters for related party loans.

“So, it remains unclear what mischief the Government is trying to stop and why the existing legislative machinery, which includes a range of penalties available to the ATO that existed before the 2019 amendments and still exist, is not sufficient.”

Burgess said all the scenarios presented in the paper could be adequately handled without the need for the 2019 amendments.

“For example, by treating the expense shortfall amount, where appropriate, as a contribution in accordance with the ATO’s contribution ruling TR 2010/1.

“If Treasury is concerned about the possibility of SMSFs incurring NALE to circumvent the caps, the issue can be adequately dealt with by amending Section 109 of the SIS Act to capture NALE for SMSFs and letting the auditor’s materiality test, and the ATO’s contribution ruling, do their jobs.

“This would be a much simpler, cleaner and measured approach to a problem, which in our view, is already dealt with by other legislative provisions.”

The SMSF National Conference, being held at the Melbourne Convention Centre, concludes on Friday with the Quality of Advice Review panel discussion featuring review lead Michelle Levy.