Proposed NALI/NALE rules for general expenses “particularly problematic”

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The Tax Institute has said proposed guidance on the new Non-Arm’s Length Income and Expense rules for general expenses in superannuation funds, released by the ATO, are “particularly problematic”.

The ATO has been consulting on draft guidelines for how it will enforce compliance with the new rules expanding Non-Arm’s Length Income (NALI) to expenses (NALE), in LCR 2019/D3 and PCG 2019/D6.

One aspect of the draft NALI/NALE guidelines that has caused concern in the industry has been where a general expense is on a non-arm’s length basis – giving the example of an accountant who owns an accounting firm, which prepares the accounts for their SMSF without charging – leading to the whole income of the fund being NALI, with the associated much higher tax rate.

The Tax Institute says this is “particularly problematic”, and recommends “significant review and clarification”, in a submission in response to the draft guidelines.

“Neither the explanatory memorandum nor second reading speech give any indication that general fund expenses such as accountancy fees that are undercharged should cause all the income of the fund to become NALI. We submit that this outcome is inappropriate.”

The submission says the Institute “considers the ATO interpretation to be incorrect”.

“A scheme not to charge (or charge less than market rates) for accountancy services or other general fund services provided to a fund typically has nothing directly to do with generating the income from fund assets.”

“The ATO should not seek to seek to taint everything.”

The submission also says that the “tone of the LCR [Law Companion Ruling] implies SMSF trustees/directors should be deterred from using their own time, skills and knowledge that they may have available to them to enhance their fund’s retirement benefits”, and that this “appears contrary to ASIC’s public comments”.

The submission also suggests that if the ATO’s view is correct, that this could not only impact SMSFs but also large APRA-regulated super funds.

“Given the ATO has to administer tax law on a fair basis between SMSFs and large APRA funds, it would obviously cause a tremendously large tax liability on taking such a view if a large APRA fund was subject to a NALI assessment for a lower fee being charged to such a fund by a related party of a contributing employer.”

The Institute also wants the guidelines to provide “greater clarity by way of further examples of a trustee acquiring services at less than standard commercial prices”.

“We also recommend that the ATO define what are typically considered to be trustee services compared to services that would not typically be provided by a trustee of a superannuation fund. This list of trustee services could provide a list for an APRA superannuation fund and an SMSF.”

General expenses is only one of the issues the Tax Institute has with the draft NALI/NALE guidelines, including questions around nexus, contributions, LRBAs.

The Tax Institute has recommended that the LCR not be finalised “in its current form”, instead calling for an amended draft ruling be issued for further consultation.

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