Key News Summary – The Commissioner has issued a draft Law Companion Ruling supporting the still unlegislated ‘non-arm’s length expenditure’ (NALI) extension to the NALI provisions for superannuation funds
On wed 19.12.2018, the ATO issued Draft Law Companion Ruling LCR 2018/D10, which discusses the proposed amendments to the non-arm’s length income (NALI) rules where a superannuation fund incurs non-arm’s length expenditure under a scheme.
These changes are contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2018, which is still before the Senate (and hasn’t moved since being introduced on 25 June 2018). See related Tax Technical Article.
The amendments seek to ensure that income is included in a superannuation entity’s non-arm’s length component and taxed at the top marginal rate in circumstances where:
- expenses are not incurred, that would have been incurred, in non-arm’s length circumstances; or
- the right to income from a trust through a fixed entitlement is acquired on a non-arm’s length basis.
The NALI provision, previously only dealt with the tax preferred superannuation entity getting too much income, in ‘non-arm’s length’ circumstances. But there were schemes based on sub-market expenses being charged to super funds – hence the provisions being extended to ‘non-arm’s length expenditure’ (NALE).
The draft Ruling explains, this first category, in more detail:
8. An amount of ordinary or statutory income will be NALI of a complying superannuation fund where:
- there is a scheme in which the parties were not dealing with each other at arm’s length
- the fund incurs a loss, outgoing or expenditure of an amount in gaining or producing the income, and
- the amount of the loss, outgoing or expenditure is less than the amount that the fund might have been expected to incur had those parties been dealing with each other at arm’s length in relation to the scheme.
9. Further to paragraph 8 of this Ruling, the income is also NALI if the fund does not incur a loss, outgoing or expenditure that the fund might have been expected to incur if those parties had been dealing with each other at arm’s length in relation to the scheme.
The draft ruling includes 7 practical examples to demonstrate the application of the proposed amendments.
PROPOSED DATE OF EFFECT: applicable to income derived from 1 July 2018 (despite the Bill still languishing in the Senate, over 6 months since it was supposed to take effect).
COMMENTS are due by 22 February 2019
CPD (comprehension) questions
- What drives the fact that superannuation funds need both NALI and NALE provisions?
- When was the last movement, of this Bill, in the Senate?
- What is NALE?
- What if no expenditure is incurred?