On Tuesday 245.1.23, the Government released a consultation paper on options to amend the non-arm’s length expense (NALE) provisions for superannuation funds – which advisers in the Superannuation space, have been ‘baying’ for, for years – especially for large funds, where just a little expenditure breach, could ‘taint’ the whole of the fund’s income (even Industry Funds, with assets in the tens of billions of dollars).to ensure they operate as intended.
The paper sets out potential policy changes to the ‘non-arm’s length income’ (NALI) and ‘non-arm’s length expenditure’ (NALE) provisions in s295-550 of the ITAA 1997.
- The NALI provisions subject the ‘non-arm’s length’ extra income to tax at the highest marginal rate.
- However, this regime was extended to funds that had excess net income, by incurring expenditure that was lower than you would expect, in arm’s length circumstances (under so called ‘NALE’ provisions).
While the Government believes the NALI rules are operating “broadly as intended”, it accepts that severe outcomes can result for some super funds in relation to general expenses (NALE).
- Under this potential approach, the functioning of NALI provisions would only change for breaches, due to schemes involving expenses, of a general nature (ie. NALE). This would be intended to mitigate the ‘tainting effect’ highlighted by industry stakeholders, where all income of the fund is potentially subject to the top marginal tax rate due to a relatively minor breach of the rules due to a general expense.
- For all funds, where a NALE is related to a specific asset, the current NALI rules would continue to apply, such that all the income of that asset will be NALI and subject to the highest marginal tax rate. This is in line with the original intent of the NALI provisions to disincentivise non-arm’s length transactions that artificially inflate the earnings of the fund.
The Government proposes that the changes, would apply as follows:
- Large APRA-regulated funds are proposed to be exempted from the NALI provisions for general expenses (NALE changes).
- For self-managed super funds (SMSFs) and small APRA funds, the paper proposes a factor-based approach whereby the maximum amount of fund income, taxable as NALI, at the highest marginal rate (45%), would be 5 times the level of the general expenditure breach.
- The ‘expenditure breach’ would be calculated, as the difference between the amount that would have been charged, as an arm’s length expense, and the amount that was actually charged to the fund.
- Where the product of 5 times the breach is greater than all fund income, all fund income will be taxed at the highest marginal rate.
DATE OF EFFECT: The changes are proposed to apply from 1 July 2023, following the expiry of the ATO’s transitional compliance approach for general expenses (PCG 2020/5) for the period 2018-19 to 2022-23.
COMMENTS are due by 21 February 2023.
[Source: Assistant Treasurer’s media release, 23 January 2023; Consultation – General Page & Consultation Paper; LTN 15, 24.1.23]
[Tax Month – January 2023, previous month, 25.1.23]