In my last editorial I wrote about the impact of the non-arm’s length expense (NALE) rules and the significant implications they might have on all of the income generated from an SMSF in some circumstances.
I covered the practical aspects of the new provisions and how significant the effects might turn out to be.
With all of these potentially unforeseen consequences arising from these changes to the legislation, logically one has to ask why they were made at all.
To give you a brief history, this whole process began when some trustees tested the waters as to whether a zero interest related party loan could be issued to an SMSF as a limited recourse borrowing.
At the time, the ATO reluctantly said while it wasn’t in favour of the practice it could not see anything illegal resulting from the strategy from a Superannuation Industry Supervision Act perspective.
In actual fact when this concept was originally being tested the ATO did issue a Private Binding Ruling giving the strategy the green light.
The regulator, however, was not happy with contentious nature and treatment of zero interest loans and eventually found a way to penalise the practice via the non-arm’s length income (NALI) provisions of the Income Tax Assessment Act.
The ATO’s stance was probably assisted at the time by many debates among SMSF technicians as to how to treat the repayments for these loans with consideration given as to whether they satisfy the definition of a superannuation contribution.
So, as you can see there was a bit of a logical timeline that led to the NALI rules.
The same cannot be said about the NALE changes. These seem to have come out of the blue without any warning or indication as to why non-arm’s length expenses are such a serious issue. And this is where perhaps we should be a little concerned.
As I wrote last month, these new rules have the potential to impact all forms of revenue for an SMSF in some circumstances that could end up costing some trustees a fortune but may also net a significant amount of revenue for the government.
This is certainly a worry because in the 12 years I’ve covered the sector it has had to overcome the mentality from non-SMSF quarters that suggested this type of superannuation structure was a rort and was providing some individuals, particularly the rich, with a massive tax dodge.
In fact, about a decade ago Treasury itself referred to SMSFs as the preferred tax avoidance vehicle. Thankfully moods and attitudes toward SMSFs shifted and mellowed over time and they were accepted as an important part of the retirement saving landscape.
However with the significant tax implications of the NALE provisions one wonders how they came about.
After all, unlike the NALI rules, there was no discussion among sector stakeholders about the serious and significant nature of non-arm’s length expenses. Not even the hint of a debate on the topic.
Knowing this can prompt speculation someone within Treasury has once again decided SMSF trustees are getting away with too many monetary benefits, not necessarily all tax related, and that their wings need to be clipped.
I certainly hope this is not the case because, having witnessed the initial adversarial attitude toward SMSFs, nothing positive came from it.
It would also mark a return to the bad old days and that is the last thing the sector or the superannuation industry as a whole needs.''