Joint bodies call for NALI ruling to be narrowed

The Institute of Public Accountants, The Tax Institute and Chartered Accountants Australia and New Zealand have called on for the ruling on non-arm’s length income (NALI) in super funds to be narrowed to the law’s original intent.

The joint bodies cautioned the ruling would have far-reaching consequences for the superannuation sector.

First issued as a draft in September 2019, the Law Companion Ruling 2021/2 outlined when expenditure or expected to have been incurred would be deemed to be under a non-arm’s length arrangement, with the Australian Taxation Office (ATO) also proposing to adjust its super contributions ruling.

“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,” the joint bodies said.

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“The ruling forces all super funds to carefully consider if all losses, outgoings and expenditures have 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 [Australian Prudential Regulation Authority] 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 bodies said the LCR 2021/2 ruling applied to a much broader range of circumstances and had much greater impact than what the super industry had understood the original government announcement was targeted at.

“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 bodies said.

“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 retirement of Australians.”