Will there be some urgency now?


The coming together of the entire superannuation sector around the issue of non-arm’s-length income and expenditure bodes well that a workable outcome will be found.

There has been an issue, which I have previously written about, of great concern to SMSFs over the past few years that threatens the tax-effective nature for this sector that the superannuation system is designed to provide.

It involves rules contained in section 295-550 of the Income Tax Assessment Act 1997 to ensure all income of a super fund is generated by way of transactions carried out on proper commercial terms – commonly referred to as the non-arm’s-length income (NALI) provisions.

The reach of these rules was extended in 2019 to include situations where expenditure incurred by a super fund was not on commercial terms – commonly referred to as the non-arm’s-length expenditure (NALE) provisions.

From the moment the NALE rules were introduced they have been contentious due to the severe tax consequences they may have for an SMSF.

Should a fund be considered to have incurred NALE, the NALI provisions will be triggered and any associated income will subsequently be taxed at 45 per cent – significantly higher than the standard 15 per cent tax rate applicable to super funds. While the ATO has tried to ease concerns by clarifying how these rule are supposed to work, with the most recent guidance being issued in July 2021 via Law Companion Ruling (LCR) 2021/2, its efforts have done little to allay the very real fears about them.

In the main, theoretically, these provisions shouldn’t represent a huge worry. Typically most situations they seem to have been implemented to cover are where a particular service has been performed for an SMSF relating to a particular asset, for example, renovations performed on an investment property. In these circumstances only the income generated on that specific property would be taxed at 45 per cent.

However, LCR 2021/2 also covers scenarios where the administration services for a superannuation fund are provided at a discounted rate or even at no charge, as is the case for certain accounting firm employees. In these situations all of the income of the fund will be seen as being linked to the NALE transaction and as a result will be taxed at 45 per cent. I think you’ll agree this is not a desirable outcome.

Until now it would have been easy for politicians and other parts of the superannuation sector to dismiss the issue because it was only egregious for SMSFs. But there has been a shift in this thinking now as industry funds have realised they could be adversely affected by these provisions too. This is because many of these funds outsource their administration functions to overseas service providers that charge discounted prices.

So all of a sudden it is now understood the NALE rules could change the taxation treatment for the majority of the superannuation industry.

This is a game changer as this matter has gained a new found impetus, and if the new government is to take any sector concerns most seriously, it will be that of the industry funds.

Assistant Treasurer and Financial Services Minister Stephen Jones has not made a commitment to review the NALE rules like his predecessor Jane Hume did before the last election, but this issue is likely to be firmly on his radar now.

Let’s hope this will result in a resolution to this problematic legislation sooner rather than later.

If you are an SMSF trustee and would like to ask the ATO directly about this subject, make sure you attend the smstrusteenews SMSF Trustee Empowerment Day 2022 to be held on 15 September in Sydney. To register, visit https://smstrusteenews.com.au/events/smsf-trustee-empowerment-day-2022/.


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