In a recent webinar for DBA Lawyers, Daniel Butler, director of the firm, said the rules around general expense and specific expense is making the application of the NALI legislation more complex than necessary.
The budget confirmed that a lower general expense to an SMSF or small APRA fund will be multiplied by two and taxed at 45 per cent, however, prior to the budget, a Treasury note stated that if the fund’s actual income for the financial year is lower that the multiplied amount, then the actual fund’s income amount is the cap on the NALI tax.
The May 2023 budget also stated that contributions will be excluded from NALI and NALE will not apply to lower expenses prior to 1 July 2018, while large APRA funds will not be subject to NALE for both general and specific expenses
However, herein lies the problem, said Mr Butler.
“You have to be careful about what is a general and what is a specific expense in relation to particular assets,” he said.
The ATO states a general expense relates to all ordinary and statutory income which currently includes assessable contributions. A two-times cap to a lower expense will apply from 1 July 2023.
A specific expense relates to expenditure relating to the acquisition of an income-producing asset. The ATO view considers specific expenses that relate to acquisition – and therefore taint the asset with NALI for life – versus specific “recurrent expense” that only taints particular financial years. There is no cap on specific expenses.
“Think about it, when you’re giving an invoice because your client is acquiring a property, particularly under an LRBA, and you give accounting services, your account is really a specific expense and if you’re doing that for your own fund and it’s lower than market value, then you would taint that asset for life,” he said.
“The fact that we’re still in this position is very unsatisfactory. The previous legislation applies until the new legislation comes in, if it ever does come in, and when it does come in what will the detail be?
“We hope further consultation will be entered into as it was the government’s call to bring in that two times.”
Mr Butler said many associations are now urging for further consultation with Treasury when the draft legislation is finalised as well as with the ATO to clarify certain matters including clarifying the divide between what is a contribution versus NALI/E.
The sector also wants more clear information on what ‘recurrent expenses’ are and what the position is if an asset is purchased via an LRBA at arm’s length but afterwards the fund fails to make regular monthly repayments.
Finally, the proposed consultations want to know the difference between a trustee versus individual service, especially where an SMSF invests via unit trusts and services are provided by SMSF trustees or members.
“We want to know if the 2 x apply to s295‐550(5)(b) & (c),” Mr Butler said.
“Advisers should monitor developments and have ‘staff discount’ policies in place by 30 June 2023.”
