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Quarantining of capital gains an option for NALE rules

William Fettes
Sarah Kendell
10 February 2020 — 1 minute read

Legal practitioners in the SMSF space are hopeful of a final ruling on the application of the recently introduced non-arm’s length expense (NALE) laws that will prevent general expenses, such as discounted accounting fees, from tainting future capital gains made by the SMSF, according to DBA Lawyers.

In a recent webinar, DBA senior associate William Fettes said with the ATO having flagged it was interested in a “practical approach” to administering the laws, one possible approach could be to quarantine future net capital gains from being tainted by NALE, particularly general expenses which had a very minimal relationship to any future appreciation of an SMSF asset.

“My view is that it would be nice to have clarification on how the ATO might analyse situations where the NALE might be tainting just the ordinary income, or the ordinary and statutory income like a net capital gain, or just the net capital gain — can they put flesh on the bones to clarify where that might happen?” Mr Fettes said.

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“There are situations where the asset is purchased for arm’s length commercial consideration, then perhaps we have some kind of revenue account where we have NALE and it might affect income for that year and everyone would be prepared to concede that, but many years down the track, we have a net capital gain that is calculated based on the appreciation of the asset.

“It’s not really attributed to the NALE in any meaningful sense, so can we quarantine the NALE to the ordinary income of the asset, or are we always going to be in the gun sights for the net capital gain?”

Mr Fettes said at this stage, it was possible that funds could be taxed at the maximum rate for a capital gain on an asset disposed of years after the original NALE had been incurred.

“We would hope for a proportional approach, but we don’t have any comfort from that draft ruling that there would be lines in the sand where we might be able to quarantine that net capital gain from something that would be a pure revenue account NALE,” he said.

He added that while the ATO’s consultation on its draft law companion ruling (LCR) had closed in mid-November, there was still no word about when a final ruling would appear.

“We don’t have an ETA on when we will get a response. I did contact the ATO [prior to the webinar], but mum’s the word at this stage, so the jury is still out,” Mr Fettes said.

“We need to see what is going to happen with the draft publication, because on the fact of it, there’s a number of examples in the LCR which would give people a cause for concern.”

Quarantining of capital gains an option for NALE rules
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