The Senate Committee, chaired by Labor Senator Jess Walsh and including Liberal Senators Andrew Bragg and Dean Smith, recommended in a report that the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 be passed. The bill includes the controversial schedule 7 implementing non-arm’s length expenditure (NALE) changes.
The committee said that the NALE rules are an “important and required integrity measure” within broader Australian tax law.
“They are complemented by other laws, regulations, and obligations to ensure that super funds are not inflating earnings to take advantage of the concessional tax rate that applies to them,” it said.
Moreover, the committee highlighted that it is of the view that this schedule is a “welcome and simple change” to ensure that penalties for breaches of the rules are proportionate to the benefit gained and said that it “shares the view of submitters that they are an improvement on the rules originally introduced in 2018/19”.
Submissions from the SMSF Association, as well as financial advice and accounting bodies, called for the repeal of the current NALE rules and new amendments to section 109 of the Superannuation Industry (Supervision) (SIS) Act to prevent superannuation funds from entering into non-arm’s length transactions.
Responding to this feedback, the committee said that while it recognises the views held by witnesses on the NALE rules more broadly, “feedback on this schedule is that the more proportionate penalty is a welcome change”.
It also stated that it agreed with the evidence provided by representatives of the Department of the Treasury which suggested alternative approaches to deter the kind of mischief envisioned by the NALE rules would not be effective.
“The committee is reassured by evidence from inquiry participants that APRA-regulated funds exempted from this change are still subject to significant prudential oversight, including regulations, reporting requirements, and other obligations,” it said.
Also included in the report was the view shared by the two Liberal Senators who said that the joint submission made by the SMSF Association and the accounting bodies, including the Tax Institute, “looks to be more proportionate and less disruptive”.
The joint approach, proposed in February this year to Assistant Treasurer Stephen Jones, suggested that the 2019 amendments to sections 295-550 of the Income Tax Assessment Act 1997 be repealed and that it be returned to its terms before the amendments were enacted.
“Further, if integrity concerns remain, it was proposed that section 109 of the SIS Act be amended to prohibit trustees from conducting any transactions with any party other than on arm’s length terms,” the Senators said.
“This section of the SIS Act is a civil penalty provision which operates as an “operating standard”. All external auditors of SMSFs and APRA-regulated funds monitor the compliance with this section. If a breach is identified in an audit, the respective regulators have wide powers under the SIS Act to examine those cases and the appropriate penalties.”
Ultimately, they argued that the alternative proposed is a “sensible solution to address any integrity concerns without placing an unnecessary burden on one sector of the superannuation industry”.
