Receiving a bum rap

ATO criticism

The ATO attracts criticism for tax policies that create adverse outcomes but the source of these issues usually start with our lawmakers.

When the ATO took over the regulatory stewardship of the SMSF sector there was an air of skepticism among some quarters of the industry. Certain stakeholders were basically concerned about the government body having a dual role of tax collector and SMSF regulator and the potential conflict of interest it created.

I first became aware of this criticism with reference to some of the penalties levied for breaches of the contributions caps around 2008 when I began covering the sector.

The budget deficits we are learning to live with have done nothing to dispel this sentiment seeing the government will be heavily focused on revenue raising as a solution to the problem.

And these concerns over the ATO having a conflict of interest have been raised again over the non-arm’s length income (NALI) and non-arm’s length expenditure (NALE) rules due to the severity of the associated penalties.

Regular readers of this column will know the NALE legislation has been a bone of contention for SMSFs since 2018 when the law came into effect.

The reason why this legislation is seen as particularly egregious is because in certain situations it can be applied to general expenses of a super fund meaning all of the income of the fund will be taxed at 45 per cent. You can see if applied in this way these rules could undermine the entire advantage of the retirement savings system.

Since that time the ATO has taken a very practical approach to enforcing these rules. While they have been in effect since 1 July 2018 the regulator has stipulated it will not be allocating any compliance resources to enforce this legislation. In reality that’s all it can actually do.

Despite this the regulator will still attract calls of disapproval from certain parts of the sector but this is actually unfair given how all of the pieces of the SMSF landscape fit together. To this end we should always be conscious of the fact the ATO is just an enforcer of the rules and not the makers of them.

If we really want change it’s our elected officials who create legislation and it’s them we really should be lobbying if we want to change this type of outcome.

And inevitably when subjects like NALI and NALE are raised the proposed use of ATO discretion is also brought up. The problem here is the regulator is often limited as to the degree to which it can exercise its discretionary powers. In the main it has been pretty good in applying them in circumstances where a solution to an adverse outcome is needed.

Take for example the ATO’s readiness to grant relief to individuals who exceed their concessional contributions cap due to a compensation payment from a financial services provider as a result of the provision of poor financial advice – a sensible and practical approach.

Further its willingness to work with trustees who use the early engagement and voluntary disclosure service and help them avoid a worrisome and perhaps expensive compliance breach is another demonstration of its want to avoid extreme compliance outcomes and associated penalties.

So while, on the surface, there can be grounds to argue the ATO has a conflict of interest resulting from its dual role there is no evidence to suggest its operation has made these fears real. As such let’s stop giving the regulator an unfounded bum rap and put the onus back on the law makers of this country to lift their game.


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