Tax Institute urges government to scrap Div 296, review NALI

In its Incoming Government Brief: June 2025 submission to Treasury, the institute highlighted the proposed Div 296 as the only measure with which the government should not proceed.

It also called for further consultation with stakeholders on the current non-arm’s length income provisions to address uncertainties in the legislation that was passed last year.

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In its submission, the Tax Institute said further stakeholder consultation and redesign are needed on Div 296 to ensure that it operates more equitably and efficiently to reduce the adverse impacts of taxing unrealised gains.

“The Tax Institute does not oppose a reduction in the concessional treatment of superannuation. However, from a policy standpoint, taxing unrealised gains sets a dangerous precedent for taxing gains that may never be realised,” it said.

“This is inherently unfair. The proposed design of Division 296 and its insertion into the ITAA 1997 is contrary to the fundamental principle of taxing only realised gains and requires further consultation due to its flawed design.”

It said the proposal to tax unrealised gains significantly diverges from the well-established approach in Australia of taxing realised gains.

“The government should amend the bill to avoid taxing unrealised gains or at a minimum, make available alternate calculation methodologies for SMSFs,” it read.

“Taxing unrealised gains could potentially have a broader impact on other CGT assets held outside of superannuation, such as investments in shares and property, which poses significant risks to investors and more broadly, the economy.”

Furthermore, it said the lack of indexation of the proposed $3 million threshold and the inability to carry back losses against tax previously paid on unrealised gains are among other serious concerns that should be addressed upfront.

“Further consultation is required to address various other concerning elements of the measure, including specifically addressing the taxation of unrealised capital gains in SMSFs and the inability to carry unrealised losses back to be applied against previously taxed unrealised gains,” the submission read.

Additionally, it said the operation of proposed section 296-30, which would impose Div 296 tax on someone who passes away on 30 June of an income year, also needs reconsidering as this would result in a tax liability that would not arise had they passed away on any other day of the income year.

The proposed tax is likely to impose unnecessary administrative burdens on affected taxpayers, the submission continued.

“Aside from liquidity challenges that are likely to arise, particularly for SMSFs, of greater concern is the taxation of gains that may never be realised. This may occur where the taxing point coincides with abnormal peaks in asset values that later fall before being realised and are not later recovered,” it added.

“Given the proposed commencement date of 1 July 2025, the government should act swiftly to refine the policy, ensuring it better aligns with equitable taxation principles and provides greater certainty to taxpayers.”

Regarding the NALI provisions, the institute said that despite recent amendments, the rules remain a complex and uncertain area, highlighting the need for further legislative change.

“The NALI provisions need to be amended to ensure that they do not continue to result in excessive and unintended consequences,” it said.

“The NALI provisions contained in section 295-550 of the ITAA 1997 remain a contentious issue, highlighting the ongoing disparity between the perspectives of the ATO and the profession regarding the intended application of these provisions.”

In particular, it read, trustees of SMSFs face uncertainty about permissible activities without triggering NALI and valuing SMSF operating expenses presents challenges, particularly when determining how to allocate fees for services provided in dual capacities, such as acting as a corporate trustee for both an SMSF and a family trust.

“The absence of a de minimis rule complicates this further, as the ATO’s guidance does not contain thresholds for minor benefits, leading to potential compliance issues,” it continued.

“Also, there is ongoing uncertainty regarding the distinction between a contribution and non-arm’s length expenses (NALE).”

It added that the ATO released TD 2024/5, which outlines the interaction between the NALI and CGT provisions of the Income Tax Assessment Act 1997.

“Specifically, example 3 from TD 2024/5 illustrates a situation where a $1 million capital gain, derived at arm’s length, is tainted and taxed at a rate of 45 per cent due to the presence of a non-arm’s length gain in the same income year,” it said.

“This example highlights a significant issue: a relatively minor tainted gain of $100 can adversely affect a substantial arm’s length gain, leading to unintended and disproportionate tax consequences.

“The ATO’s interpretation and the widespread lack of certainty demonstrate that legislative amendments are necessary to address this disproportionate impact on taxpayers and to clarify the Parliament’s intention.”