Back in July this year, the ATO released LCR 2021/2 clarifying how the amendments to section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) operate in a scheme where the parties do not deal with each other at arm’s length and the trustee of a complying superannuation entity incurs non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income.
The ATO ruling confirmed that the general expense cannot have a direct link to the income of the fund and that non-arm’s length expenditure (NALE) can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.
With the final ATO ruling on the amendments to the NALI rules resulting in significant consequences for minor errors, some of the industry associations and professional bodies, including the Institute of Public Accountants, The Tax Institute and Chartered Accountants Australia and New Zealand, joined together to call for potential changes to the non-arm’s length income rules.
DBA Lawyers director Daniel Butler said while some time has passed since the ATO’s ruling was finalised, NALI continues to be an ongoing issue with the joint bodies still in negotiations with Treasury and the government and the ATO.
“The rules in their current form have broad application and may tax all future income of a super fund at 45 per cent for immaterial breaches,” said Mr Butler.
“These breaches may arise from commonly conducted activities, such as typical accounting and advisory services for low or no fees or trustees being required to act in the best financial interests of their members by choosing a lower cost option. The scope of these rules likely means that all superannuation funds, SMSFs and large funds, will at some time fall foul of them.”
He also noted that the 45 per cent NALI rate of tax is also higher than that imposed on large multinationals subject to transfer pricing or anti-avoidance provisions.
“Moreover, NALI/NALE can taint all of a fund’s income and the income or gains on affected assets,” he said.
“We’ve got this legislation which has been introduced which is very broad and has far reaching consequences and we’re still trying to get our heads around when it applies and where it will apply. There’s not enough guidance out there and the legislation overreaches.
“There are around 10 to 12 professional bodies working on this on an ongoing basis to try and get some answers. We are hoping there will be some change in the law.”
Mr Butler said it’s possible that the government could look to release further information on this in its Mid-Year Economic and Fiscal Outlook this month.
“That could be an appropriate time for the government to release that message, and this is something that the industry is wanting an urgent fix on for both large APRA-regulated funds and small funds,” he stated.
SMSF Association deputy chief executive Peter Burgess said non-arm’s length income is still very much a live issue in relation to the non-arm’s length expenditure rules.
“There are a group of associations, and [the SMSF Association] is part of that group, that have been having discussions with Treasury as well as the ATO to try and make some changes to the rules so that we don’t end up in situations where just a very small expense that hasn’t been incurred on arm’s length terms results in all the income in the fund being taxed at 45 per cent plus the contributions being taxed at 45 per cent,” explained Mr Burgess.
“We want to avoid those situations. So we’re hopeful that we will still see some changes at some point.”
