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ATO ruling aimed at SMSFs could create a “monumental” tax issue for large funds

Shaun Cartoon portrait lores v2
A much-anticipated ruling, finalised last week by the ATO, has the potential to trigger billion-dollar tax liabilities that would ultimately be borne by mum and dad members of large superannuation funds, according to tax partner Shaun Cartoon.

In an opinion article published in today’s AFR, Shaun warns that the Law Companion Ruling 2021/2 concerns the application of so-called non-arm’s length income (NALI) and non-arm’s length expense (NALE) rules and, while it primarily focuses on self-managed superannuation funds, the principles apply equally to Australia’s largest APRA-regulated superannuation funds.

Shaun explains that under the new ruling, if a superannuation fund incurs non-arm’s length expenses in purchasing an asset, the income subsequently derived from that asset – and any future gain made on its disposal – will be taxed at the top marginal rate of 45 per cent.

“The real worry, though, is that if a superannuation fund incurs a general expense that is not connected with any particular asset, the ruling confirms the ATO’s position that all of the income of the fund will be taxed at the top rate.  A relatively immaterial expense item can taint the income of the whole fund.

Shaun writes that it is not enough for the fair application of these new rules to rely on the commissioner’s promise not to look too closely. “In our view, the ruling renders this tax law untenable for large funds and legislators should immediately move to carve them out.”

To read Shaun’s article, click here

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