The federal government has softened the taxation penalty it will apply to non-arm’s-length expenditure (NALE) breaches from that proposed in a consultation paper released earlier this year, according to details contained in last night’s budget.
Budget Paper 2 stated the government will “amend the non-arm’s-length income (NALI) provisions which apply to expenditure incurred by superannuation funds by limiting income of SMSFs and small Australian Prudential Regulation Authority (APRA)-regulated (SAR) funds that are taxable as NALI to twice the level of a general expense”.
The budget paper position appears to reflect a shift from that put forward in a consultation paper released by the government in late January, which stated SMSFs and SARs would be subject to a factor‑based approach to set a limit on the amount of fund income taxable as NALI due to a general expenses breach.
“The maximum amount of fund income taxable at the highest marginal rate would be five times the level of the general expenditure breach, calculated as the difference between the amount that would have been charged as an arm’s-length expense and the amount that was actually charged to the fund,” the consultation paper stated.
Budget Paper 2, however, did not differ from the consultation paper when describing the application of the NALE penalty to large APRA-regulated funds, stating as part of the NALI amendments, the government would be “exempting large APRA-regulated funds from the NALI provisions for both general and specific expenses of the fund”.
SuperConcepts SMSF technical and strategic solutions executive manager Phil La Greca said the change meant the NALE tax penalty was “not a punishment”, but issues raised during the consultation process remain unanswered.
“This is a softer position than in the consultation paper and the outcome is not as heavy, but we are unsure how fund expenses paid by someone else and treated as a contribution will also fall under the NALE rules,” La Greca told smstrusteenews.
SMSF Association head of policy and advocacy Tracey Scotchbrook said the application of the revised penalty regime may be dependent on a fund’s particular situation, leading to different outcomes.
“For example, if you had a $200 shortfall on a $1200 general expense, under the old model you would be paying penalty tax on five times $200, but if it’s the whole of what the actual expense is, under this model then you’re going to be taxed on two times $1200.”
Smarter SMSF technical and education manager Tim Miller said the exemption of APRA-regulated funds was inequitable for the super sector.
“I think it’s a better outcome than the previously proposed measure because it suggests the penalty will be using a multiple of two rather than five,” Miller told smstrusteenews.
“However, overall it’s not necessarily a better outcome because the problem with the previous proposal was it is all too hard for APRA funds and so it was only ever going to apply to self-managed super funds, so there is still no equality between the two.”
All three said more detail would have to be provided to properly assess the policy.
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