TD 2023/D1 outlines the ATO’s views on the interaction of NALI provisions in the Income Tax Assessment Act 1997 and the capital gains tax (CGT) provisions in the act to determine the amount of statutory income that is NALI where a capital gain arises as a result of non-arm’s length dealings.
According to SMSF Association chief executive Peter Burgess, while it is good to receive clarity on the issue, it is concerning that the draft ruling appears to be contrary to the industry’s understanding of how the NALI provisions are intended to work.
“The industry’s long-standing belief has been that where a capital gain arises because of non-arm’s length dealings, you only treat as NALI the net capital gain that relates to that particular CGT asset,” Mr Burgess said.
“By contrast, the view expressed by the ATO in draft TD 2023/D1 – how NALI and CGT provisions interact to determine the amount of statutory income that is NALI – is that the NALI capital gain can taint other capital gains incurred by the fund in the same income year.
“The NALI provisions may have evolved over the years, but we do not believe that it has ever been government’s intent to apply penalty tax rates to a genuine arm’s length capital gain.”
He added: “We will continue to consult with the ATO before this determination is finalised to get more clarity on why alternative views are being overlooked.”
The draft determination provides a number of examples to demonstrate the calculations, as well as outlining some alternative views on how the NALI and CGT provisions interact and why these views are not supported.
The examples provided by the ATO, Mr Burgess said, only cover scenarios where an accumulation fund has acquired an asset on non-arm’s length terms.
He added that it would be useful to also see examples where an SMSF incurs a non-arm’s length capital expense such as a property improvement and where an SMSF is paying a retirement phase income stream.
Last week, Treasury opened consultation on Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds to enact amendments to the non‑arm’s length income (NALI) provisions that were announced in the 2023–24 budget.
The amendments to the NALI provisions will apply to expenditure incurred by superannuation funds, referred to as the non‑arm’s length expense (NALE) rules.
At the time of the announcement, Mr Burgess said the association will actively participate in the consultation process.
“We maintain our view that the NALE rules, which were inserted in the legislation in 2019, should be repealed across the board for all superannuation funds, not just large APRA-regulated funds,” he said.
