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Huge tax hit awaits trustees ignorant of NALE changes

Trustees who are not across the wide-ranging implications of recent law changes to non-arm’s length income and expenses will face a big tax on any income and capital gains falling under the new legislation, warns a technical expert.

SMSF Adrian Flores 10 March 2020
— 2 minute read

The legislative changes backdate NALE to apply from 1 July 2018 and impact on any dealings by a super fund which are not on an arm’s-length basis irrespective of the parties of the transaction, said SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley.

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He noted of the dangers of any income and capital gains coming within the new legislation.

“It’s important for the sector to come to grips with the wide-ranging implications of the change and not put its head in the sand,” Mr Colley said.

“The danger is that any income and capital gains coming within the new legislation are taxed at 45 per cent.”

Mr Colley noted the legislation was accompanied by the usual explanatory memorandum which spells out that the application of the legislation depends on the capacity in which the trustee undertakes the relevant transaction.

ATO rulings leaving some issues unresolved

Further, the ATO published two rulings which provided the commissioner’s views on the legislation, Draft Law Companion Ruling (LCR 2019/D3) and Draft Practical Compliance Guideline (PCG 2019/D6).

Mr Colley said LCR 2019/D3 indicates that the operation of the legislation is not limited solely to transactions that are attributable to the particular investment or transaction but can extend to general fund expenses as well.

“It would apply in situations where one or more of the expenses of running the fund are not on an arm’s-length basis and in some situations may result in all of the income and capital gains of the fund being taxed at the 45 per cent rate,” he said.

Meanwhile, PCG 2019/D6 provides short-term relief for the 2018–19 and 2019–20 financial years where the general expenses of running the fund are not on an arm’s-length basis.

“The ATO has said it will not apply compliance resources for those years if the fund has incurred expenditure during those years which is not on an arm’s-length basis,” Mr Colley said.

“This just means that the ATO will turn a blind eye to general fund expenses that are provided to the fund at less than a market price.”

Unfortunately, Mr Colley said the ATO drafts have left a number of unsolved issues which will be covered hopefully in the finalised rulings.

“Some of the scenarios require greater clarity as they impact on a wide range of trustees/members who provide their professional services or business premises to undertake work on behalf of the fund at no cost or at a discount,” he said.

“The question is, will the non-arm’s length rules apply to general fund expenses such as accounting or preparation of the fund returns and result in the fund’s income being taxed at 45 per cent?

“Our understanding is that we may see the final of PCG 2019/D6 in the near future, but it is the publication of LCR 2019/D3 which may be a little way off. Hopefully, it will provide the clarity required on those members who provide their skills or business premises at less than a commercial arm’s-length rate.”

Huge tax hit awaits trustees ignorant of NALE changes
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