NALI/E impasse putting super at risk of penalties: lawyer

The transitional compliance approach where the ATO agreed not to enforce general expense NALE outlined in PCG 2020/5 expired on 30 June 2023.

Mr Butler said the ATO declared in February that it would not extend PCG 2020/5 beyond 30 June 2023. However, considering the ongoing non-finalisation of the NALE legislation, urgent action is necessary to prevent the application of NALE to all ordinary and statutory income, including concessional contributions.

During The Tax Institute’s National Superannuation Conference, it was observed that given the Treasury Laws Amendment (Measures for Consultation) Bill 2023 (NALE bill) has not been passed, there is a potential gap between the conclusion of the ATO amnesty and the commencement of the new legislation.

The NALE bill provides that the new provisions will commence either 1 January, 1 July or 1 October 2024 after it receives royal assent.

It is now before the Senate Economics Legislation Committee which means the earliest it could be put in force as law is 1 January 2024, assuming it is passed by both houses of Parliament and receives royal assent before 31 December 2023.

Currently, a breach of the NALE provisions during this time will result in categorising all ordinary and statutory income, including net capital gains and assessable contributions of the fund as non-arm’s length income (NALI), meaning it will be taxed at 45 per cent instead of the usual 15 per cent tax rate.

Mr Butler said when the ATO first announced the proposed amendments to NALI, many in the SMSF industry were shocked that it would essentially apply to situations such as accountants providing services for an SMSF for a discounted or nil fee.

“The ATO drew the nexus between a general expense and all ordinary and statutory income including concessional contributions and the super industry was alarmed and very concerned,” Mr Butler said.

“The ATO said it would give the industry time to adjust and wouldn’t apply any compliance resources until the legislation was finalised, but it is still not finalised. PCG 2020/5 was extended for several financial years as the legislation kept getting delayed.”

He added the debate around NALI/E has been ongoing for more than five years and there is now a “big cloud above our heads” in terms of whether another extension will occur to PCG 2020/5.

“It means that even if you apply a $1 discount now everything could be NALI – ordinary income and statutory income such as net capital gains, franking credits and concessional contributions,” he said.

“While the proposal is to exempt large funds from NALE they too are now living under a cloud as all super guarantee contributions could be hit up by this current impasse.”

Although Mr Butler said that most in the industry likely trusted that the legislation would have passed by now, the fact that it has not means the PCG 2020/5 extension has lapsed and the ATO can now apply its arsenal of compliance resources to those that breach the general expense NALE provisions.

“We know the ATO is taking an increasingly harder line in regard to compliance,” he said.

“If an SMSF is involved and gets a discount from its accountant of $100 or the financial planner uses some company software, the ATO legally would now have to apply the law and a general expense will give rise to ordinary and statutory income being taxed at 45 per cent.”

He warned that as the law stands today, concessional contributions are also in jeopardy.

“If it is applied to a large fund, they will have to admit they have NALI/E as many large funds receive discounted services from related entities,” he said.

“And as the law now stands it could be applied to billions of dollars in contributions by blue-collar workers and their compulsory superannuation guarantee contributions could go up in smoke.”

Mr Butler added that large funds have a duty to warn members of these risks and that, although it is unlikely to occur, it is nevertheless a technical risk that should be communicated to members.

“The super industry has been working with the government, Treasury and the ATO for close to five years and we end up with this position which is a mess,” he said.

The major accounting bodies and the Tax Institute have requested the NALE legislation be withdrawn as it is no longer needed.

“If and when the NALE Bill is passed as law, there will be a two-times multiple on the amount of the lower or nil general expense (compared to what the arm’s length general expense would have been) that will be taxed at 45 per cent,” Mr Butler added.

“The bill will also exclude large funds from NALE both specific and general NALE. Moreover, it will exclude concessional contributions from being taxed at 45 per cent.”

Currently, however, all ordinary and statutory income including concessional contributions are at risk of a 45 per cent tax, Mr Butler stated.

“Hopefully the ATO will extend PCG 2020/5 to the end of 30 June 2024 given the current (unacceptable) legal predicament.”