SMSFA calls for NALE/NALI to be repealed in Treasury submission

“Despite these proposed amendments, concerns on unintended consequences remain,” the submission stated.

“The live issues surrounding general expenses of a capital nature, specific expenses and capital gains are not considered in this Bill.

“As a matter of urgency, the entire superannuation sector needs a solution to remediate the far reaching, unintended consequences present in the existing non-arm’s length expenditure (NALE) provisions.”

The joint submission has recommended repealing the 2019 NALE amendments stating there already exists well-established and effective compliance levers within the taxation and superannuation compliance frameworks.

“These are further supported through rulings and guidance published by the Commissioner of Taxation and associated compliance activities. These amendments create further duplication in regulation, increasing complexity and red tape for all stakeholders,” it stated.

If the amendments proceed, the submission continued, unintended outcomes will persist and further changes would be needed to address the outstanding operative issues and concerns.

“The stated policy rationale for introduction of the 2019 amendments was to address concerns regarding certain related party limited recourse borrowings (LRBAs). This was despite the Australian Taxation Office, as regulator for the SMSF sector, having already addressed that concern,” the submission stated.

“The publication in of PCG 2016/5 Income tax - arm’s length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds, and the safe harbour terms for arm’s length dealing, has achieved its objective in ensuring that related party LRBAs are conducted on arm’s length terms.

“Arrangements outside the Commissioner’s guidelines that do not sufficiently and appropriately substantiate an arm’s length arrangement will result in the application of non-arm’s length income (NALI).”

Prior to the introduction of NALE, well-established principles and Commissioner guidance required the non-arm’s length element of an expense (revenue or capital) to be recognised as a contribution ensuring the correct value was recorded in the fund’s accounts and the contribution rules were applied and tested against the members’ available contribution cap.

It also acted as a contribution integrity measure, ensuring that the contribution caps could not be avoided.

However, the submission warns that the amendments will mean that contributions that exceed the applicable cap will trigger taxation consequences.

“A person’s non-concessional contributions (NCC) cap is subject to a total superannuation balance (TSB) test,” it stated.

“Members with a TSB equal to or exceeding the general transfer balance cap as at 30 June of the previous financial year will have a NCC cap of nil. Any resulting contribution will automatically be an excess contribution.

“An excess NCC not withdrawn from the fund, will be subject to a 47 per cent rate of tax.”

The submission also noted the exposure draft does not address general expenses that are capital in nature which exposes all of a fund’s income to NALE.

These can include expenses such as a deed update which may be either revenue or capital in nature and more broadly relatively small costs incurred by an SMSF could result in all the fund income being taxed as NALI at 45 per cent.

Other examples could include software acquired by the fund for its administration, share trading, or investment management.

Another unintended consequence raised in the submission is the taxation of capital gains as NALI which requires an urgent legislative solution.

Additionally, the exposure draft does not address the severity of the NALI rules in relation to specific investments which remains a significant issue for the SMSF sector.

“With the proposed amendments an opportunity exists now to address a range of disproportionate outcomes that can arise under the current law,” the submission continued.

“For example, under the current law, a small capital expense can taint the entire capital gain derived by the fund when the asset to which the specific NALE relates is eventually sold.

“This will have retrospective application when we consider the accrued capital gains over the life of the asset prior to the incurrence of the expense.

“Further, it risks tainting gains accrued prior to the introduction of the NALE provisions. A capital repair to property during the holding period or when preparing it for sale is an example of such an expense.”

The exclusion of large APRA funds from the amendments is inequitable, claims the submission, and demonstrates a lack of neutrality on behalf of the government.

Rather, the submission suggests that a workable, legislative solution is needed for the whole superannuation sector.

“The 2019 amendments have added significant complexity with far-reaching consequences well beyond the original policy intent,” it stated.

“The proposed amendments are a vast improvement on the current law, and we thank the government for a solution which breaks the nexus between general NALE, and income derived by the fund.

“However, it remains our view that the 2019 NALE amendments should be repealed for all funds. Given the existing compliance frameworks present in the superannuation and taxation compliance legislation, the risks associated with NALE are insignificant and the likely outcomes innocuous.

“Should the 2019 NALE amendments not be repealed for all funds, and the government proceeds with the proposed amendments, it will be critically important that the proposed amendments are broadened to address disproportionate outcomes arising from specific NALE and general NALE which is capital in nature, and inconsistencies in the way the CGT provisions interact with NALI.

“Failure to do this now, will ultimately require further amendments to the NALI provisions, and a further period of confusion and uncertainty for industry and regulators.”