Does the NALI/E punishment fit the crime?
The long-running NALI/E debate has not considered the “extremely heavy-handed treatment” the specific asset NALI provisions impose.
.
David Busoli, director of SMSF Alliance, said advisers should ensure their clients understand the importance of dealing at arm’s length. In cases involving related-party limited recourse borrowings, he stressed that it is crucial to adhere strictly to established protocols and guidelines.
He said that if a specific asset breaches non-arm’s length income (NALI), both its income and future capital gains can be permanently affected and result in a 45 per cent tax impost.
He said there are three examples from Law Companion Ruling 2021/2 that indicate the unreasonableness of this rule.
The LCR 2021/2 outlines the application of the Australian Taxation Office’s view on the non-arm’s length expenditure (NALE) provisions and clarifies when and where an outgoing, expenditure or loss can constitute NALI.
The ATO’s view is that where an expense is incurred by a fund that is less than an arm’s length amount, all of the fund’s ordinary income and statutory income (including net capital gains and concessional contributions) is NALI and, after attributable expenses, is taxed at 45 per cent.
Mr Busoli said the first example in the LCR 2021/2 concerns Russell, whose SMSF purchases $900,000 of listed shares from a related entity for $500,000.
“He doesn’t take measures to have the difference treated as a non-concessional contribution,” Mr Busoli said.
“All future dividends and eventual net capital gain will be NALI and taxed at 45 per cent.”
He said that if Russell were trying to limit his capital gains tax (CGT) on the sale of the shares to his fund, he would have failed as the market substitution rules would revalue the transaction, for CGT purposes, to $900,000.
“In keeping with this principle, the cost base shown by the SMSF, for eventual CGT purposes, would also be $900,000,” Mr Busoli said.
In the second example, Kellie lends her SMSF 100 per cent of the $2 million required for the fund to purchase a property from an unrelated party using a related-party limited recourse borrowing.
“The interest rate is 1.5 per cent, paid annually over 25 years. The property is rented to an unrelated party at commercial rates,” Mr Busoli continued.
“Because the terms of the loan are not allowable under the safe harbour provisions, the net rent, and subsequent taxable capital gain on sale of the property, will be NALI and subject to 45 per cent tax. This is a permanent position. Even refinancing the loan through a bank won’t help.”
The final example involves Trang, who is the trustee of her sole member SMSF. She is also a plumber and runs her own plumbing business as a sole trader.
“Trang renovates the bathroom and kitchen and doesn’t charge the SMSF. Trang has permanently tainted the asset, so it will be treated similarly to Kellie’s,” Mr Busoli said.
“Clearly, the punishment far outweighs the crime, but the regulator is reticent to consider changes simply because it doesn’t believe the provision has ever been applied to this type of scenario.”
Keeli Cambourne
27 November 2023
smsfadviser.com
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
October - December 2023 archive
- Working after pension age
- Does the NALI/E punishment fit the crime?
- EPOA crucial for SMSFs, says professional adviser
- Economic and market outlook for 2024: Global summary
- Five investing tips for beginners
- Setting up the next generations of retirees
- A 2023 Advent Calendar for our clients
- Most Expensive Wars In History
- ATO takes hard line on in-house asset rules
- How to budget using the 50/30/20 method
- SMSFA says proposed super legislation will hit farmers, small businesses the most
- Investment and economic outlook, October 2023
- The benefits and risks of collectable super assets
- Teaching children about the value of money
- Most powerful countries throughout time.
- Retirement is not just about dollars
- Unfair Terms in a Standard Form Contract
- Too many businesses roll the dice on tax debt: Jordan
- Revised NALE rules ‘miss chance to clarify SMSF bugbear
- 6 simple rules will ensure a deed can be executed in all states
- Our investment and economic outlook, September 2023
- The benefits and risks of collectable super assets
- High deposit rates, but the case for equities is strong
- Most powerful LEADERS of All Time