The draft legislation (the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (Bill)) includes a limit on general NALE for SMSFs.
Parliament resumes on 24 June 2024 and unless the legislation is passed before 1 Jul 2024, the earliest next date that the NALE changes can take effect will be from 1 October 2024 with retroactive effect from 1 July 2018.
It is disappointing that SMSFs are placed in this difficult and uncertain position and reflects poorly on our legal system. This article summarises this predicament and its impact.
Proposed NALE changes
By way of background, we have extracted some paragraphs that provide a summary of the proposed NALE changes from our previous article ‘Status update on the non-arm’s length expense legislation as Senate approves’:
The Bill will, when it becomes law, reduce the tax impact where a lower or nil general expense is incurred by an SMSF by imposing an upper cap on the amount that is taxed as non-arm’s length income (NALI) under s 295-550(1)(b) and (c) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
This cap is in the form of a two-times multiplier of the amount of the lower general expense for an SMSF or a small APRA fund. The example below outlines how this cap will apply.
While the amendments are an improvement on the current law (where general lower expenses are said to be connected to all ordinary and statutory income including concessional contributions), the SMSF Association and several other professional bodies believe the 2019 NALE amendments should have been repealed for all funds and not just for the large APRA-regulated funds. Moreover, numerous professional associations representing both large and small funds requested changes to ensure NALI was more proportionate and fairer, however, these requests were ignored.
In particular, there is no relief for SMSFs for specific expenses which will be subject to the usual NALI rules in s 295-550. A specific expense will be any other expense other than a general expense. A specific expense relates to ‘gaining or producing income in relation to any particular asset or assets of the fund’.
Delays exposé funds to substantial risks
Under the current law, an SMSF incurring a general fund expense that is NALE, or a nil expense where an expense should have been incurred if the parties were dealing at arm’s length, can result in a 45 per cent tax liability applying to the following:
- All of the fund’s ordinary income.
- All the fund’s statutory income (including net capital gains and franking credits).
- Assessable contributions received by the fund.
A 45 per cent NALI tax rate also applies even if an SMSF is in the pension or retirement phase.
Like SMSFs, large APRA funds and small APRA funds can also be exposed to a 45 per cent tax liability for discounts concerning general expenses until the Bill is finalised as law.
Still no ATO relief
The ATO’s Practical Compliance Guideline PCG 2020/5 provided some relief for the 2018–19 to 202223 financial years as the ATO was not applying its compliance resources to general NALE in respect of these five years. However, this transitional compliance approach ceased on 1 July 2023. With the Bill now unlikely to pass until later this year, both large and small super funds remain exposed. Thus, it is hoped the Commissioner will reconsider extending the relief in PCG 2020/5 for the 2023–24 and, if needed, for the 2024–25 financial year.
Conclusion
Advisers must be aware of the potential impact on their clients. In particular, firms offering discounts without a properly documented SMSF staff discount policy are exposing themselves and their staff to substantial risk.
