Treasury this week opened consultation on Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds to enact amendments to the non‑arm’s length income (NALI) provisions that were announced in the 2023–24 budget.
The amendments to the NALI provisions will apply to expenditure incurred by superannuation funds, referred to as the non‑arm’s length expense (NALE) rules.
As was stated in the budget, the bill contains amendments to the Income Tax Assessment Act 1997, which:
- Limits application of the NALE rules to SMSFs and small APRA-regulated funds (SAFs).
- Distinguishes between specific and general expenses for the purposes of NALE rules for both general and specific expenses of the fund.
- Sets the amount of income taxable as NALI from a general expense breach by an SMSF or SAF as twice the difference between the amount that would have been charged as an arm’s length expense and the amount that was actually charged to the fund.
- Limits potential income of the fund taxable as NALI to the fund’s taxable income less contributions and related deductions.
- Exempts expenses which were incurred or might have been expected to be incurred before the 2018–19 income year.
The SMSF Association CEO Peter Burgess said the association will actively participate in the consultation process.
“We maintain our view that the NALE rules, which were inserted in the legislation in 2019, should be repealed across the board for all superannuation funds, not just large APRA regulated Funds,” he said.
“The mischief that the 2019 amendments sought to address has previously been addressed by ATO contribution ruling TR 2010/1 and the publication of safe harbour rules for related party LRBAs.
“It remains unclear to us why the 2019 amendments were required and we will continue to advocate strongly for a repeal of these provisions for all funds. While the proposed amendments announced in the 2023-24 Federal Budget are an improvement on the current law, it will still require SMSF trustees to identify a non-arm’s length expense which, in many cases, may not be a straight forward or objective task and will require SMSF trustees to report small amounts of non-arm’s length income.
“The resulting compliance burden and increased cost is, in our view, unjustified.
“We also note the measures announced in the Federal Budget do not address significant issues with the way the NALE rules are applied to SMSF specific expenses. In particular, the application of these rules to realised capital gains and the inability of SMSF trustees, in appropriate circumstances, to rectify the situation.
“Should the NALE rules not be repealed across the board for all superannuation funds, we will continue to advocate for appropriate measures of rectification for SMSF trustees in relation to the application of the NALE rules to specific expenses.”
Daniel Butler, director, DBA Lawyers and a specialist in SMSF legislation, said many SMSF trustees are not aware of the breadth of these provisions and recommended advisers ensure there is ongoing education and monitoring for NALI and NALE risks in their client base.
“While this is some good news for general NALE, hopefully, more consultation will occur before the legislation is finalised as further changes were sought by the superannuation industry,” he said.
“Moreover, specific NALI remains an ongoing serious concern that exposes all future ordinary and statutory income to a 45 per cent tax rate including a future net capital gain on disposal of the asset.
“Naturally, we would be pleased to assist with advice, training and assisting with any representation in relation to NALI/E matters.”
Institute of Public Accountants, general manager technical policy, Tony Greco said reducing the penalty from five to two might seem like a win but it was not what the professional bodies were hoping for from the government after years of consultation.
“The existing rules under the SIS Act in conjunction with existing ATO rulings was enough to deal with the intended mischief,” he said.
“Lawyers, financial advisers and accountants undercharging for services to their SMSF are clearly what is intended for these rules to catch.
“Auditors will now need to be watchful for services provided by trustees which could drive up audit costs particularly trying to work out what is an arm’s length market price for a service.
“At least we now have certainty on the way forward which is important as the ATO removes its non-compliance approach on general expenses that are non-arms transactions as from 1 July 2023.”
