David Busoli, founder of the SMSF Alliance, said there has been a lot of discussion over the past few years around NALE, with the focus being on general expenses where a non-arm’s length activity taints the fund’s income.
“Though the initial proposal was draconian in its application it has morphed into something much more benign,” he said.
He said where a non-arm’s general expense has been detected such as accounting or financial planning work that has been provided at no charge, the penalty will be applied as follows:
- Value of SMSF accounting services provided at no charge: $4,000
- Fund income (excluding assessable contributions): $50,000
less eligible deductions:$10,000 - Net fund income (the cap): $40,000
The NALI component is $8,000 (2 x $4,000) being twice the non-arm’s length expense.
“It is capped at the net fund income which means that the NALI component, in this example, is $8000 and this amount is taxed at 45 per cent,” Mr Busoli said, adding it is problematic as to whether NALE will be reported.
“The ATO is not going to investigate situations where firstly a reasonable attempt has been made to apply an arm’s length amount,” he said.
“It will also not investigate if a broad staff discount has been applied or the trustee has provided the service in their capacity as trustee only.”
He added that as reporting is not part of a fund remaining SIS-compliant, auditors will not be required to check whether any NALE has occurred.
“Significantly, all four accounting bodies and the SMSF Association, have called for the NALE amendment to be abandoned,” Mr Busoli said.
The NALI/E amendments are currently before the Senate for further review and in the past week, representatives from the SMSFA and accounting bodies have been lobbying MPs in the hope the recommendations they have made are considered.
In a joint submission on the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, CA ANZ, CPA Australia, the IPA, the SMSFA, and The Tax Institute said they recommend Schedule 7 of the bill be removed.
In its submission, the joint bodies said the “policy proposed to be implemented by Schedule 7 to the Bill aims to alter, rather than eliminate, measures that were put in place to address concerns that are now outdated”.
It continued that if they remain, it will result in a two-tiered superannuation system.
Aaron Dunn, CEO of Smarter SMFS, said in the latest SMSF Adviser podcast that the representatives of those bodies have pointed out to the Senate that the NALI/E amendments have made the proposed changes “deliberately an SMSF issue” and not a broader industry issue.
“APRA funds have been excluded from it so therefore, are we trying to fix a problem that actually doesn’t exist?” he asked.
“Perhaps the best solution is to go back to where we were and even if there is an issue can we actually put it within the arm’s length requirements for example, in the SIS rules rather than the tax rules?”
He added that he believes that there needs to be more uniformity applied to the legislation rather than “carving out some differences in between”.
“Hopefully through this process of consultation at a Treasury level, or at least raising these issues, we may see the Treasury contemplate this further, and therefore these measures might not proceed as they currently are.”
