Date posted: 29/07/2021

ATO casts the NALI net too wide says joint bodies

Following the release of the ruling on non-arm’s length income (NALI) in super funds by the ATO today, the joint bodies have cautioned this decision will have far-reaching consequences for the superannuation sector.

First issued as a draft in September 2019, the Law Companion Ruling 2021/2 outlines when expenditure or expected to have been incurred would be deemed to be under a non-arm’s length arrangement, with the ATO also proposing to adjust its Super Contributions Ruling.

The joint bodies – Institute of Public Accountants, The Tax Institute and Chartered Accountants Australia and New Zealand - have joined together to call for the ruling to be narrowed to the law’s original intent.

“At the same time as the whole super sector has been helping Australians navigate their retirement like never before, they’ve been waiting with bated breath for the finalisation of this ruling which seems to demand perfection,” said the joint bodies.

“The ruling forces all super funds to carefully consider if all losses, outgoings and expenditures have justifiably occurred on arm’s length terms.

“It is concerning that if finance teams, accountants or advisers get any transaction wrong in any super fund, including APRA regulated funds, that fund could pay the highest marginal tax rate at 45% on all its income including realised capital gains.

“There are mammoth consequences for minor errors which means that solutions need to be worked through very carefully requiring considerable time and expertise.

“Because of this potential outcome all super funds need more certainty about how they go about their business.”

The LCR 2021/2 ruling applies to a much broader range of circumstances and has much greater impact than what the super industry had understood the original government announcement was targeted at, said the joint bodies.

“The ruling which has opted to show the broad application of these non-arm’s length rules even to relatively benign situations and the ATO has clearly indicated that it intends to apply a broad interpretation to these rules.

“The ATO has provided multiple opportunities for professional bodies and the industry to comment on these rulings throughout its development and we look forward to continuing this collaboration with the ATO to investigate how this ruling will apply in practice.

“We will also work with government to request that these rules be narrowed so that benign or minor expenses cannot create such a disproportionate outcome to a super funds’ tax affairs and in turn severely deplete the retirement savings of Australians.”

Related: ATO publishes final ruling on non-arm’s length tax rules for all super funds

Chartered Accountants ANZ provides information on ATO ruling non-arm’s length expenditure and resulting much higher tax rates

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