More loose ends flagged with NALI measures

Mr Burgess said that, while Labor is opposed to the SG amnesty measure contained in the same bill, which is the main reason it has been stuck, they are more likely to support the changes to NALI because it is an integrity measure designed to ensure that the rules operate the way they were intended to work.

“So, regardless of who wins the election, we are likely to see this measure reintroduced into the new Parliament. It was intended to start from 1 July 2018 and that may still be the case,” he said.

These NALI measures, he explained, will restructure section 295-550 of the Income Tax Assessment Act, which is the section of the act that deals with NALI.

“Under the current law, if an SMSF receives income that is higher than what you would expect it see if the parties were dealing with arm’s length, then all of that income is taxed as NALI; in other words, the fund has to pay 45 per cent tax on that income in the fund,” he said.

“Now if this measure comes in, even if that income is on arm’s length terms, the income will still be taxed as NALI if the fund does not incur an expense on arm’s length terms in relation to that income.”

In December last year, the ATO released draft guidance on the provisions which eased industry concerns about a potential conflict between the proposed new NALI rules and the rules concerning SMSF trustees charging for services under 17B of the SIS Act, Mr Burgess said.

The ATO’s draft ruling explained that if the trustee provides a service to their fund and they are not able to charge their fund because they are not licensed to provide that service, the non-charging of that fee won’t invoke the new NALI rules, he said.

While the draft ruling has shed some light on the proposed changes, Mr Burgess said that there are still “some loose ends that need to be tied up”.

“For example, if the trustees are licensed to provide a particular service and they are providing that service to the general public and they also provide that service to their own fund, are they providing that service in their capacity of a trustee or in their capacity of a professional? And if they outsource or use the services of a firm to provide that service, are they then considered to have outsourced that service?” he questioned.

“A good example is financial planners who provide investment advice to their own SMSF — are they providing that particular service in their capacity as a trustee or are they providing it in their capacity as a professional?”

The draft ruling doesn’t deal with this issue particularly well, he said, but based on discussions with the ATO, if the trustees are licensed to provide a particular service and they’re providing that service to their own fund and they’re using the resources of their business to provide that service, then these new provisions are likely to apply.

“So, for example, a financial planner, if their fund appears on a list of funds, which is being serviced by their firm, then we think these new NALI provisions are likely to apply.

“So, even though these NALI changes are not as significant as we first thought, certainly for clients whose funds receive services from related entities and the related entity is not charging an expense on arm’s length terms, they are likely to be impacted by this change and it will be necessary for that related entity to start charging fees on arm’s length terms in order to avoid these new NALI provisions coming in.”