The ATO has released its ruling, LCR 2021/2, on non-arm’s length income and expenditure provisions that apply to all super funds.
The ruling was released on 28 July 2021.
This article should be read in conjunction with ATO publishes final ruling on non-arm’s length tax rules for all super funds Part 1 and ATO publishes final ruling on non-arm’s length tax rules for all super funds Part 3.
Ruling has far reaching consequences for super sector
The ruling forces all super funds to prove if all outgoings (loss, outgoing or expenditure) have occurred on arm’s length terms. That is, effectively all outgoings on a revenue or capital basis. A fund also needs to identify if a loss, outgoing or expenditure that should have ordinarily expected to incur but did not and then consider if this is unacceptable.
If it is determined that a fund has occurred any outgoing for anything other than an arm’s length basis then the fund needs to determine if the non-arm’s length anti-avoidance income tax rate should apply to all income of the fund or to a specific portion of the income related to the non-arm’s length expenditure.
The individual highest marginal tax rate (45%) applies to income identified as attributable to the non-arm’s length activities. If applicable this would include the pension income of a super fund.
When will all income of a super fund be subject to the non-arm’s length rate?
If the expenditure incurred does not specifically relate to a particular amount derived by the fund then all the fund’s income, including realised capital gains, would be subject to the penalty tax rates. Some examples found in LCR 2021/2 are the following:
- Actuarial costs
- Accountancy fees
- Audit fees
- Costs of complying with super law regulatory provisions
- Premiums for trustee indemnity insurance policies
- Investment adviser fees and costs in providing pre-retirement services to members
- Other administration costs incurred in managing the fund
On the other hand, what happens when a fund receives a discount? The LCR says (par 51) that discounts will not give rise to tax penalties where “they are consistent with normal commercial practises, such as an individual acting in their capacity as trustee (or a director of a corporate trustee) being entitled to a discount under a discount policy where the same discounts are provided to all employees, partners, shareholders or office holders.”
And “services provided to a complying superannuation fund on a pro bono basis will also still be on arm’s length terms where the trustee (or director of a corporate trustee) of the fund is not able to influence the service provider’s decision to supply the services on a pro bono basis.” (par 52)
However, example 8 in the LCR says a discount provided to an employee of an accounting firm is acceptable because the discount is available to all staff of the firm and the employee was unable to influence the amount of the discount. We are yet to verify how this might apply to the principals and partners of smaller accounting practises.
Tainting specific income
If a non-arm’s length arrangement applies to a specific super fund investment, then it is likely to be subject to the non-arm’s length tax rates.
Example 11 of the LCR deals with a licensed real estate agent (Sharon) who uses all her business services and equipment to manage a property owned by her super fund. This is deemed a non-arm’s length transaction and as a result the rental income on that property will be subject to the non-arm’s length tax rate.
Applies to all super funds
These rules apply to all super funds including APRA-regulated funds. Given that these new rules potentially taint all income of a super fund it is essential that large super funds which may have many arm’s length members consider all their commercial arrangements and can justify why any expenses or outgoings the fund incurs are based on a justifiable arm’s length price. This might include favourable capital raising transactions.
CA ANZ Member queries
CA ANZ members with questions about this ruling should contact us at: [email protected].
Read Part 1 and Part 3 for the complete breakdown of the final ruling on non-arm’s length tax rules for all super fundsRead Part 1Read Part 3