SMSFA pushes for ‘make good clause’ to address NALE concerns

The SMSF Association has previously expressed concern that the NALE rules, which took effect on 1 July 2018, could have far-reaching and unjustifiable consequences for superannuation funds once the ATO’s transitional relief ends.

Mr Burgess previously warned that the rules could result in situations where all the income received by an SMSF, including taxable contributions and realised capital gains, is taxed at 45 per cent simply because the SMSF failed to incur a small fund expense on arm’s length terms.

The ATO has extended its transitional compliance approach outlined in PCG 2020/5 for an additional year. However, this is due to cease on 30 June 2023. PCG 2020/5 only relates to general expenses that have been incurred on a non-arm’s length basis.

With only six months left till the transitional relief ends, Mr Burgess said the SMSF sector and broader superannuation industry is eager to see some of the issues in this area addressed through legislation.

“It’s important we have a legislative fix before then to ensure these provisions work fairly and equitably. We don’t want situations where an SMSF ends up paying 45 per cent on all its income because it didn’t incur an admin fee on arm’s length terms,” he stated.

At the very least, Mr Burgess said the association would like to see a ‘make good clause’ introduced into the provisions which would enable trustees to fix a problem where it’s been an inadvertent error.

“Where there’s been an inadvertent error or innocent mistake, there needs to be the ability for trustee to be able to fix the problem,” he explained.

Mr Burgess noted that under the current laws, the Commissioner of Taxation has no discretion with these kinds of situations.

“That’s why we think at the very least a make good clause is what’s required,” he said.

“We’re still hopeful we’ll see a legislative fix early [this] year.”

DBA Lawyers director Daniel Butler explained that large APRA-regulated funds are facing a particularly difficult situation as many of them will need to start preparing for the changes now if they haven’t already.

“The dilemma for the large funds is that they need to do a lot of work to get restructured by 30 June. They’re sweating on it because they can’t just change it overnight, they need to do a lot to prepare for that 1 July 2023 start date,” Mr Butler told SMSF Adviser.

“So, they’ve got a big change to make, but they haven’t got the clarity on where they need to be.”