New provisions pave way for big NALI bills
Under the draft legislation for the non-arm’s length income (NALI) provisions, taxpayers in certain schemes or arrangements will need to ensure they undertake good record keeping of expenses to avoid “severe” taxes being applied to the fund.
As part of Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2018, the government is seeking to address a “technical deficiency” in the current provisions for NALI whereby non-arm’s length expenses result in the income not being treated as NALI as intended.
The explanatory memorandum (EM) for the bill states that the amendments are aimed at “removing any ambiguity in this respect and ensur[ing] that superannuation entities cannot circumvent the provisions by entering into schemes with non-arm’s length expenditure”.
The new provisions are an extension to the existing laws around NALI, and one of the concerning aspects is that non-arm’s length incomes are a “self-executing provisions”.
“All the ATO has to do is issue an assessment — there are no checks and controls. So the onus is on the taxpayer to prove that the assessment from the tax office is excessive,” explained DBA Lawyers director, Daniel Butler.
“So the taxpayer has to have supporting documentation on any expense, and at times it’s very difficult to get the evidence. So it puts the taxpayers at a task of proving that everything is at arm’s length.”
If the taxpayer does not have adequate records and they have been issued with an assessment by the tax office, then they could be hit with a 45 per cent tax on the income from a particular transaction, the director cautioned.
“The onus is on you to disprove the ATO, and therein lies the problem,” Mr Butler said.
While the taxpayers are able to object to an assessment by the ATO, and can take it to the tribunal or the Federal Court, this could be very costly and time-consuming, according to Mr Butler.
“For you to defend yourself under NALI, you need to have records and benchmarking. Whereas the commissioner doesn’t have to prove anything, the commissioner just alleges that this is non-arm’s length income and therefore the taxpayer will be charged at 45 per cent,” Mr Butler said.
For SMSF practitioners with clients entering arrangements where there is potential for non-arm’s length income to be applied to the income, Mr Butler recommended they encourage clients to gather evidence of their dealings along the way.
“If you just sail through without getting your evidence, it’s very hard later on to back-fill and compile that evidence,” Mr Butler said.
“It’s the only way. What we have to advise as a practitioner is, look, it’s too risky, get your evidence along the way. If you just sail through without getting your evidence, it’s very hard later on to back-fill and to go back and compile that evidence. Very costly in time. It’s also difficult to compile the evidence later on because people’s memories are gone, etc.”