Ahead of the SMSF Adviser Technical Strategy Day 2024,
DBA Lawyers director Daniel Butler said the new non-arm’s length income (NALI) legislation has left the SMSF industry wanting more.
Changes to the NALI provisions in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 took effect from 1 July 2024.
These changes apply retrospectively from 1 July 2018, and as such, trustees will need to consider any impacts to their fund and report any non-arm’s length expenses under the new law in addition to any NALI.
“The industry wanted a fairer and more proportionate treatment, particularly with specific expenses,” Butler told SMSF Adviser.
“When you have a specific asset, a lower expense taints the entire asset. That means that any income or capital gain in the future could be tainted and taxed at 45 per cent. What the government has done is just fix it up where, say, the accountant does a lower general expense, and then they capped that lower expense by a multiple of two, and then they apply the 45 per cent to that, eg, a $1,000 discount is multiplied by 2 = $2,000 which is taxed at 45%, $900 in tax.”
Butler contended that a “clear, fair, and proportionate” integrity measure is required that allows the commissioner to forgive SMSF trustees who have made honest mistakes.
The commissioner must make a determination to invoke the general anti-avoidance provision, Part IVA, in the Income Tax Assessment Act 1936 (Cth). However, NALI/E applies automatically and there is no need for a determination to be made by the commissioner.
“With the way the law is drafted, where a lower expense taints the asset forever, particularly with non-arm’s length expense (NALE), that can have a very disproportionate impact,” he said.
Butler cited the explanatory memorandum to the new NALE legislation that has a specific NALE example where Sam, a builder, does $3,000 of improvements to his SMSF that taints that property forever at 45%. This is very harsh as Sam and his spouse were probably aiming to do the best to improve their retirement savings and were not aware of the complexity of the law. This is a severe punishment for such a minor oversight, especially as $3,000 does not cover much work at all.
“It’s unfair because there’s no discretion for the commissioner to overlook inadvertent or honest oversights. In life, humans make errors. To err is to be human. We should not kick them in the guts when they are down. We should look after them and give them another try. We need a provision that is forgiving if people have intended to do the right thing but have fallen into a trap.”
Butler also cited the example of Trang from the ATO’s ruling LCR 2021/2, who is the trustee of her sole member SMSF and a plumber who runs her own plumbing business as a sole trader.
Trang renovated the bathroom and kitchen in her rental home but did not charge the SMSF for her work and permanently tainted the asset. That would then be taxed at 45 per cent on any net rent and future capital gain.
“These mistakes are going to happen. This is a very harsh and blunt tax that needs fixing,” Butler said.
“The industry, as well as the small and large funds, all agreed to implement specific NALI amendments so it would be fairer.”
During his session at the SMSF Adviser Technical Strategy Day 2024, Butler will provide an overview of NALI and NALE rules and the recent changes in respect to general and specific expenses that invoked NALI/E, and flag traps and risks and offer tips on how advisers could help clients circumvent them.
He urged advisers to stay abreast of the NALI/E rules and tips and traps and remain on guard for their clients, particularly if they are builders who have real estate investments and undertake their own handy work.
“Advisers must tell clients to watch out for specific expense NALI. If they’re transferring business real property like a farm to a super fund as a contribution or transfer to purchase, they would need to get proper evidence such as valuation so that when it comes in, it’s at market value,” Butler said.
To hear more from Daniel Butler about how changes to NALI/E rules could impact your SMSF clients, come along to the SMSF Adviser Technical Strategy Day 2024.
It will be held on the following dates and locations:
Tuesday, 15 October, at Blackbird, Brisbane.
Tuesday, 22 October, at Rydges, Melbourne.
Thursday, 24 October, at Shangri-La, Sydney.
Click here to book your tickets and make sure you don’t miss out!
For more information, including agenda and speakers, click here.
This conference is produced by Captivate Events. If you need help planning your next event, email director Jim Hall at jim@captivateevents.com.au.
