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NALE delay creating ‘fear and uncertainty’: legal expert

By Keeli Cambourne
June 06 2024
4 minute read
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There is increasing uncertainty and fear among SMSFs with the further postponement of the passing of the NALI/E legislation, says a leading legal expert.

Daniel Butler, director of DBA Lawyers, told SMSF Adviser the Senate’s rejection for a second time of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (Cth) due to the instant asset write-off amendments means it is now subject to further delay and may not be passed by 30 June.

“Numerous professional bodies including The Tax Institute, CA ANZ, SMSF Association, CPA, IPA, IFPA and NTAA have expended considerable time and effort to have the non-arm’s length income (NALI) provisions put on a more fair and proportionate basis,” he said.


“Ultimately, what was proposed was a cap on general non-arm’s length expenses (NALE) for SMSFs is now stuck in Parliament when the law is supposed to have taken effect from 1 July 2018. Six years from the application date, this retroactive law is still not finalised and we have continuing ongoing substantial uncertainty that the large superannuation funds and SMSF industry are trying to work with.”

The bill also includes, among other things, an exemption for large superannuation funds from both general and specific NALE. Large funds remain subject to specific NALI.

Butler said that under the current law (s295-550 of the Income Tax Assessment Act 1997), technically even a small discount for a general expense will currently expose both large APRA funds, small APRA funds (SAFs) and SMSFs to substantial exposure as it results in all taxable contributions, ordinary income and statutory income including capital gains and franking credits, is subject to a 45 per cent tax if NALI applies.

The ATO provides a range of examples in its ruling LCR 2021/2 where accountants, financial advisers and tradespeople who provide services below an arm’s length fee to their SMSF give rise to NALE, which in turn invokes NALI.

Butler said the ATO would like firms and businesses to have a documented staff discount policy that is based on reasonable benchmark pricing for a discount to an SMSF by an employee, officer or shareholder not to invoke NALE. He added that he believes many firms have not yet implemented a documented staff discount policy despite the substantial risks that currently prevail with general expense NALE.

“The ATO view is that a general expense has a nexus to everything in the fund which is why the NALE legislation was prepared. The proposed change, if it ever eventuates, is designed to cap the NALI arising from general NALE to twice the lower than arm’s length amount, subject to any reasonable discount where a documented staff discount policy exists,” he said.

“The draft legislation is now back in the House of Representatives and the NALE provisions are in the same legislation as other tax changes such as IAWO provisions proving contentious. The Senate requested an increase to the IAWO amount from $20,000 to $30,000 and an increase in the turnover of businesses eligible to claim this write-off.”

With Parliament not sitting again until 24 June to 4 July, Butler said there is only a short window of opportunity to finalise the draft NALE legislation before the winter parliamentary break.

“Unless this is passed by 1 July 2024, the current substantial ongoing uncertainty lingers, plaguing large APRA, SAFs and SMSFs. If the legislation is not passed before 1 July 2024, the next earliest starting date for the NALE legislation to take effect is 1 October 2024,” he said.

To that end, Butler said large APRA funds should be communicating the above risks to their members that their super could be taxed at 45 per cent including every member’s compulsory SG contributions.

He said this would be prudent given some large funds do have non-arm’s length dealings as the government decided to exempt them from specific and general NALE. However, large funds are subject to the current law and are therefore in uncertain territory, which is a serious issue.

“SMSFs are also subject to great uncertainty as advisers, lawyers and SMSF auditors are raising concerns about the substantial uncertainty. It's difficult to give clear advice and guidance when the law is so uncertain. This may also result in more auditors qualifying their audit reports based on NALI/E. Naturally, compliance costs may increase with this uncertainty and greater complexity in the system,” he said.

“While the ATO was not applying its compliance resources towards detecting general expense NALE, this position ceased on 30 June 2023. There is no longer any comfort under PCG 2020/5 if the ATO detect a NALI/E issue whether before or after 30 June 2023. A PCG is not binding on the ATO, so there is no protection currently as the law and ATO practice stands especially for general NALE issues from 1 July 2023.

“There is now an increasing need for the ATO to extend PCG 2020/5 to apply for the year ending 30 June 2024 and through to the period until after the NALE legislation commences. This would alleviate some uncertainty and risk until the legislation is finalised and becomes law.”

He added several ATO guidance materials appear to be stalled pending the finalisation of the NALE legislation including the revised contributions ruling TR 2010/1-DC on the divide between NALI and a contribution and TD 2023/D1 on the interaction of NALI and the CGT system.

“Returning to the very sound cause that numerous professional bodies embarked upon years ago when the NALE changes were proposed, the law should be fair, proportionate, and certain. NALI/E do not fit this description and the current legislation and the proposed changes are in need of urgent reform,” he said.

“A revised NALI/E regime that is fair, proportionate, and certain and that also takes into account that ‘to err is to be human’ and provides a discretion for honest and inadvertent oversights is well overdue.”

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