NALI changes welcome but more needs to be done: SMSFA
The SMSFA said that although it welcomes the changes to the NALI legislation, a good enough legislative framework for dealing with CGT is still lacking.
Tracey Scotchbrook, SMSFA head of policy and advocacy, told SMSF Adviser that the ATO had previously consulted on a draft tax determination looking at how CGT would be treated if an SMSF sold an asset when there was a non-arm’s length impact.
“Contrary to what the industry thinks, the presumption was that the tax would apply just to the affected asset, but when we look at it there is actually no ability to excise a specific CGT event from the CGT method statement, so we have the effect of tainting other capital gains with how the law currently sits,” Ms Scotchbrook said.
“It is an unintended consequence, it’s the classic case where you have one piece of tax legislation dealing with a raft of taxpayers then one specific to super around the calculation of fund income and application of non-arm’s length income and there is a misalignment.
“We also have issues where minor expenses that relate to a specific asset can taint the whole of the capital gain as NALI.
“These need to be urgently looked at as a legislative solution is needed.”
Last week, the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 was tabled in Parliament. It contained amendments to the non-arm’s length expenses with respect to general expenses.
“You can be forgiven for missing it as it is one little measure buried in the Bill amongst a range of other business measures,” Ms Scotchbrook said.
“It has been included here to try and quickly address some of the distortions that would occur for general fund expenses.”
And while the legislation is substantially unchanged from what was in the exposure draft, there are a couple of crucial differences, said Ms Scotchbrook. One of them is that it addresses general expenses that are revenue or capital in nature.
“In the previous exposure draft it only talked about general expenses of a revenue nature,” she said.
“As we’ve started to have conversations around how this would apply, it became apparent that, of course, there are expenses that are general expenses that are capital in nature.
“This was really important to make sure they have the same treatment and the way this legislation has been drafted makes sure that it’s general expenses of all kinds, revenue or capital in nature.
Ms Scotchbrook said the original draft exposure looked at fund general expenses that were revenue in nature – those not related to a specific asset. It proposed a tax on two times the difference at 45 per cent whereas the original budget announcement proposed a five times approach.
“We argued that the NALE measures are not needed and that the level of non-compliance with regards to general expenses is really low and immaterial. Certain related party limited recourse borrowings originally triggered the introduction of NALE. But this issue had already been successfully addressed by the ATO,” she said.
“We preferred to have it removed but the government was keen to retain this integrity measure. For general expenses, the issue was the tainting of the whole of the fund’s income as NALI. This has now been resolved with the tax calculated on two times the difference.
“Another important change is that this two times measure has been made retrospective so it aligns with the commencement of non-arm’s length expense rules that came into force in 2019.
“So not only have we seen if it comes down from a multiple of five to two we’ve also seen the timing is in better alignment from when changes were originally introduced.”
