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Pensions, Tax

Pension-phase NALI treatment clarified

pension phase CGT

Rules governing non-arm’s-length capital gains tax (CGT) triggered by assets used to support an pension phase income stream have been clarified.

The SMSF Association has secured confirmation from the ATO as to how the rules governing non-arm’s-length capital gains tax (CGT) triggered by assets used solely to support a pension phase income stream will be applied.

To this end, the regulator has stated the amendment to Treasury Laws Amendment (2020 Measures No 6) Act 2020, granted royal assent in December last year, will take effect from 1 July 2021 and means all non-arm’s-length capital gains in relation to segregated current pension assets will be treated as non-arm’s-length income (NALI) from that date.

The existing legislation had been changed to rid it of the anomaly created by section 118‑320 of the income Tax Assessment Act (ITAA) 1997, which dictated any capital gain made from a segregated current pension asset can be disregarded, making any capital gains from these assets exempt from the NALI provisions.

However, conflicting information regarding the legislation change had until now existed, with the amendment indicating it had come into effect immediately, while the relevant explanatory material specified the new provisions would only apply from 1 July 2021 onwards.

As such, the SMSF Association sought clarification from the ATO about this matter and has now received the regulator’s categorical position on it.

“Effectively, this means that if a non-arm’s-length capital gain is made by a segregated current pension asset before 1 July 2021, it does not cause NALI. If a non-arm’s-length capital gain is made by a segregated current pension asset on or after 1 July 2021, it does cause NALI,” SMSF Association technical manager Mary Simmons said.

Simmons pointed out apart from NALI, other factors such as general anti-avoidance provisions, like those stipulated in Part IVA of the ITAA, deemed contributions and excess contributions tax, and promoter penalty laws must also be considered in these circumstances, and this level of complexity was another demonstration of why it was important for trustees to receive specialist financial advice.

“Understanding the interaction of the NALI, CGT and ECPI (exempt current pension income) provisions is complex at the best of times. Add a layer of uncertainty in relation to deficient law and it highlights the importance of seeking specialist advice to ensure other super and tax laws are not at risk of being breached,” she said.

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