Tony Greco, general manager technical policy for the Institute of Public Accountants, said the NALI/E saga has been going on for so long it could be “turned it into a mini-series for die-hard super tax professionals to get them to sleep each night”.
“Since the legislation was tabled back in 2019 there have been many twists and turns and a change of Government,” he said.
“The policy intent behind the original NALI/E law change (S295-550 ITAA 1997) was predominantly to address non-arm’s length related party loans.
“This mischief has been adequately addressed by the ATO’s ruling TR 2010/1 so there is no real justification to make the rules more complex by extending NALI to include expenses.”
He said the IPA has steadfastly maintained its position that the 2019 amendments that introduced the NALE provisions and the proposed amendments in the exposure draft fail to meet the original purpose.
“Treasury has not quantified nor articulated the perceived mischief they are after but want to introduce complex laws to address other perceived concerns outside of the original policy intent,” he said.
In a joint submission to Treasury in collaboration with the SMSF Association, Chartered Accountants Australia and New Zealand, CPA Australia, and The Tax Institute it was recommended an alternative approach was proposed, which Mr Greco said maintains integrity of the superannuation system without adding complexity.
“That recommendation was to repeal the NALE rules so that the law reverts back to pre-July 2018 terms and use TR 2010/1 rules to capture non-arm’s length dealings and amend section 109 of the SIS Act to prohibit trustees from conducting any transaction with any party other than on arm’s length,” he said.
“The proposed amendments add insult by applying a differentiated tax treatment of NALI/E rules by exempting large APRA-regulated funds.
“This differentiation is further evident by the Government in the way it intends to apply the proposed 15 per cent tax on balances greater than $3 million.”
Mr Greco said large APRA funds cannot report actual taxable earnings per member as easily as SMSF, so are pushing an unfair methodology (unrealised gains inclusion and treatment for losses) in the interest of simplicity for the proposed new 15 per cent tax.
“The SMSF sector, which is predominantly – some say as high as 75 per cent – is impacted by this measure and is being given little choice in the way this new impost is to be calculated despite its unfairness,” he said.
“After all the joint advocacy on this NALI/E issue we remain hopeful that the Government at least will come back to the negotiation table and revisit its intended sledgehammer approach.
“More complexity is unhelpful particularly when there are pre-existing safeguards that already exist to deal with the perceived mischief which has not been quantified.”
Tracey Scotchbrook, head of policy and advocacy for the SMSFA, said given the unity and strength of the voices from within the industry the challenge is that the draft exposure is an anti-avoidance measure and it will be interesting to see if the government has the appetite to wind it back.
“The consistent theme with our submission is this whole thing has come about because of the original changes made since 2019 and which really need to be repealed,” she said.
“It was a regulation put in place to address a particular issue with Limited Recourse Borrowing Arrangements and the ATO had already put in guide rails and a safe harbour stance to make sure they were at arm’s length.
“That has been successful and remedied those issues. The legislation came in after the fact so this is really a duplication of regulation in this space.
“It’s like applying a sledgehammer to crack a walnut or a solution in search of a problem, but the problem is in the drafting which has ended up having a much wider impact and is getting more complicated with a lot more unintended consequences flowing through.”
Ms Scotchbrook said there is a raft of potential impacts not just for SMSFs but for accountants and auditors if amendments are not considered.
“There’s a potential impact for accountants preparing and lodging returns for funds to have appropriate conversations with those clients to make sure they pick up the tax consequences and penalties that may arise,” she said.
“There could be the potential for litigation risk if there is a substantive tax bill. And that is similar for auditors.
“Although auditors don’t have to report to the Commissioner, it will come down to that materiality and the challenge will be that if something has not been charged how do you detect that?
“Although the risk of non-compliance is low particularly in the area of general expense, and the quantum dollar amounts are small and ordinarily considered immaterial, it will be an interesting space to watch.
“The large funds are happy because they have been expressly carved out completely and it’s important that they are because the risk of tainting those funds would be disastrous.
“But we need a level playing field.”
The more Tax Laws and Rulings are being reinterpreted the more I wondering whether it is millennials working in the ATO are reading the Tax Acts and thinking “This is not right” although the original interpretation has been going on for over 50 years in some cases without any challenge. This is creating havoc in the profession and yet we hear nothing from the Commissioner of Taxation as he is MIA as usual until he has to appear in Senate Estimates.