Government told to scrap NALE provisions

The entire superannuation sector is in urgent need of a solution to remediate the “far reaching, unintended consequences in the non-arm’s length expenditure provisions”, the joint accounting bodies and SMSF Association have said.

Amendments introduced in 2019 have caused significant concern for the superannuation sector and fail to meet their purpose, the Charted Accountants ANZ, CPA Australia, the Institute of Public Accountants and SMSF Association said in a recent submission.

Last month the government released exposure draft legislation with a proposed solution aimed at addressing industry concerns.

Under the proposed amendments, large APRA-regulated superannuation funds are exempted from both general and specific expenses within the NALE regime.

The industry associations have rejected the proposed policy, stating that this would result in two-tiered superannuation sector where different types of superannuation funds are treated differently.

“This differential treatment raises questions, as the trustees of these funds are subject to the same statutory best financial interests duty, common law fiduciary obligations and the sole purpose test, making the discrepancy in treatment questionable,” the submission stated.

“We do not support differential treatment of superannuation funds where a differential treatment is unnecessary.”

The associations are instead calling for the repeal of the 2019 to section 295-550 of the Income Tax Assessment Act 1997 and a return to the former legislative provisions.

“Any remaining concerns regarding non-arm’s length arrangements in any superannuation fund can be addressed by the ATO and the superannuation sector in light of the current version of ATO Taxation Ruling TR 2010/1, which uses the contributions framework to remedy such breaches,” the submission stated.

“Amendments to section 109 of the Superannuation Industry (Supervision) Act 1993 (SISA), which already prohibits trustees from engaging in transactions with any party unless they are conducted on arm’s length terms, would provide additional safeguards if the Government considered that these are necessary.”

The submission stated that repealing the provisions would be the “most equitable, practical, and least disruptive of all solutions proposed to date, and would result in a substantially better approach than creating a differential tax treatment for different types of superannuation funds”.

Superannuation bodies AIST and ASFA have both welcomed the exemption provided to public sector schemes which would see them exempted from the non-arm’s length income rules relating to expenses.

ASFA stated in its submission that the integrity issues to which the NALE aspects of the NALI rules were directed do not arise in large APRA-regulated funds.

“We welcome the acknowledgment in the draft explanatory memorandum that there is, for large funds, “a lower risk that these funds will gain a tax advantage by engaging in schemes with related parties to incur losses or outgoings at less than arm’s length,” the association said.

However, AIST wants the exemption broadened to apply to specific expenses as well as general expenses.

“The proposed Bill does not provide certainty about the historic treatment of specific expenditures,” AIST said in its submission.

Treatment of general expenses

The accounting bodies and the SMSF Association said the proposed changes to the treatment of general expenses in SMSFs and small APRA-funds are an improvement compared to the previously legislated rules and the proposal in the consultation paper.

“However, we remain cautious about the proposed change to the rules relating to general expenses, where any NALI arising would be capped at a maximum ‘two times multiple’ and by the taxable income of the fund,” they said in the submission.

“This cap has the potential to lead to inequitable outcomes. We consider that the current version of TR 2010/1 provides a logical approach by treating minor breaches of the NALE rules as contributions. This approach ensures simplicity and efficiency, as the treatment of contributions acts as a self-correcting mechanism.”

Treatment of specific expenses

The SMSF Association and accounting bodies are also deeply concerned that numerous issues relating to the treatment of specific expenses under the NALI/E regime have not been addressed by the exposure draft.

“As a collective group of associations, as well as individually, we have repeatedly raised these concerns with Treasury and the ATO,” the submission said.

The associations said there were several problematic areas where the existing treatment of specific expenses falls short of a satisfactory resolution and will continue to do so should the legislation be passed as currently drafted.

“We recommend that the issues relating to specific expenses should be fixed as a matter of immediate priority in the best financial interests of superannuants,” the submission said.

Provisions should allow for remediation

The provisions also don’t allow a fund to remediate immaterial and inadvertent breaches.

“In appropriate circumstances, for expenses that related to a specific fund investment, trustees should be given the opportunity to rectify the breach by “making good” the expense shortfall amount,” the SMSF Association stated in its submission.

“Under this approach the income received from the asset to which the NALE relates could still be taxed as NALI up until the income year in which the NALE is rectified. We support the inclusion of anti-avoidance measures that seek to address deliberate, and substantive schemes to avoid tax, the contribution caps or the operation of other compliance measures. However, any attempts to address this must be targeted and proportionate.”