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Super fund non-arm’s length income rules in need of urgent reform

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In an article published in Thomson Reuters Weekly Tax Bulletin, Taxation partner Shaun Cartoon and lawyer Andrew Spierings took the time to explain the application of the ATO’s recently released Law Companion Ruling 2021/2.

The ATO’s ruling concerns the application of the non-arm’s length income (NALI) and the non-arms length expenses (NALE) rules.

The purpose of the NALI provisions is to prevent the inflating of superannuation fund earnings through non-arms length dealings by segregating NALI from other income and taxing it at the top marginal rate. In 2018, the NALI rules were amended to include the concept of NALE. This followed a perceived deficiency in the NALI provisions whereby non-arms length expenses (including where no expenses were charged) resulting in income not being treated as NALI. However, one of the more contentious aspects of the Ruling is the ATO's view that if a non-arm's length expense is general in nature, and not connected to any particular asset (or the amount of income derived from that asset), it follows that the expense has a sufficient nexus to ALL of the income of the fund (which is therefore all NALI).

The article argues that for large funds, the ruling will place additional pressure on the already complex internal controls required of superannuation funds, and the employees who manage them. In a previous opinion article published in the Australian Financial Review, Shaun argued that urgent legislative reform is necessary. Large APRA funds should be entirely carved out of the application of these rules. For SMSFs, there should at least be a proportion or materiality rule so that a $1 mistake doesn't lead to such a significant and punitive erosion of a family's nest egg.

To read the article, click here.

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