Treasury late last month released a consultation paper on options for amending the non-arm’s length income provisions for super funds.
The consultation paper was issued after industry associations and accounting bodies raised concerns about scenarios arising where there would be disproportionately severe outcomes for minor breaches of these rules.
The potential policy changes developed by Treasury only relate to general expenses, which have a sufficient nexus to all ordinary and statutory income derived by the fund.
It’s proposed that SMSFs would be subject to a factor-based approach wherein the maximum amount of income taxable at the highest marginal rate would be set at five times the level of the general expenditure breach.
Speaking in a recent podcast, DBA Lawyers director Daniel Butler said the joint professional bodies have already had a preliminary meeting about the proposed measures.
Mr Butler said the general view is that the proposals fall short of the total overhaul of the non-arm’s length income provisions that industry was looking for.
He noted that the proposals fail to address any of the concerns raised by the professionals bodies in relation to specific expenses.
He referred to example nine involving Trang from the ATO’s Law Companion Ruling 2021/2.
“Trang is a plumber and she’s got two rental properties in her fund. In the second rental property, she did up the kitchen and the bathroom. Now I’m sure that if Trang knew that when she did that, she would think twice and get advice,” he said in a recent SMSF Adviser Show episode.
“So the example that Trang doing some work would expose all of her fund income means she automatically tainted with this 45 per cent tax rate is one of the biggest issues that industry doesn’t like. Industry was calling on the government to say ‘we need a total overhaul’.”
Mr Butler said that the joint professional bodies have been consistent with their view that the issue around specific expenses also needs to be addressed.
“It could be a small discount on the front end of the acquisition which means that asset is then tainted for life,” he warned.
“It’s not only rental income [that is tainted], it’s also the capital gain in the future.”
Mr Butler stated that the joint professional bodies recognise the need for an integrity measure in relation to non-arm’s length income but would like to see one that is proportionate and fair.
“Let’s take Trang and she fell into the trap not knowing. If it was honest and inadvertent then give Trang another go, don’t taint her property forever,” he said.
“We need an opportunity to rectify it and it should be in that context of early engagement and voluntary disclosure.”
There have also been concerns raised about the length of the consultation period, he noted.
“We’ve been given a really short consultation period which is really unfair for a measure like this,” he stated.
“A lot of the people have been really offended given the amount time that top professional in Australia have dedicated in this area. There’s been QC and barrister input and top advisors from large, small and medium accounting firms have all put a lot of effort in trying to do the proper job here over a long period of time and they come out with this.
“So there’s a real disappointment as to what we have been served. We would hope that Treasury really takes on board all the effort to get this system right, for a very important part of our economy.”
Simple solution: tally up all the hours you spend working on your Fund (other than in your role as Trustee), knock up an invoice at the end of each year – $10,000pa sounds like a nice round figure.
Take out the money and spend it on yourself, or put it straight back in as a deductible contribution.