Still room for clarification on NALE: Heffron

Changes to legislation regarding non-arms length expenditure (NALE) “won’t please many” who are dealing with the payments, according to Heffron.

A key ruling from the Australian Taxation Office (ATO) updated earlier rules on when transactions between a superannuation fund and another party created NALE.

NALE existed when expenses incurred by a self-managed super fund (SMSF) were less than the amount incurred if the parties had dealt with each other on an arms length basis.

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According to Meg Heffron, managing director of Heffron, said: “In other words, if a fund’s costs are artificially low, some or all of its income is taxed at the top marginal tax rate of 45% rather than the normal superannuation rates of 15% or nil.

“The ATO has consulted widely and has ended up in a place that won’t please a lot of us on every front.”

The final ruling divided NALE into two buckets:

  • Costs that related specifically to an individual asset – in which case all future income in relation to that asset is tainted forever and will be non-arms length income (NALI) (including capital gains); and
  • Costs which don’t relate to an individual asset and are therefore deemed to relate to all income of the fund – in which case NALE means all fund income was NALI.

It also drew a distinction between work done by self-managed superannuation fund (SMSF) trustees and whether they would face a NALE problem in the future, which was dependent on:

  • Work done in the person’s individual capacity – which might create a NALE problem if the fund was not charged arm’s length rates; or
  • Work done in their trustee capacity – where it was generally OK not to charge for the work, since being a trustee naturally involves (unpaid) work and sometimes that work will leverage particular skills the trustee happened to have.

Heffron said there still remained several issues to be worked through on the ruling, which included staff discounts and use of company equipment by financial advisers and accountants.

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