Peter Burgess

The recent passing of amendments to the non-arm’s length income (NALI) Bill was a step in the right direction – but important loose ends still need resolution.

Addressing the SMSF Association’s 2024 Technical Summit in Sydney, CEO Peter Burgess said although the passing of the legislation – the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 – gave the industry “much needed relief and certainty” with respect to general expenses, but applying NALI rules to specific fund expenses remained a “vexed issue”.

“How is it fair or equitable to tax the entire capital gain from the sale of a property, which the SMSF may have held for many years, as NALI simply because the trustee did not incur an expense on commercial terms for a minor renovation?”

“Taxing the entire capital gain as NALI is a severely disproportionate outcome.”

Burgess said this issue, as well as others relating more generally to the application of the NALI rules to specific expenses, was now the new front-line in the ongoing battle to ensure the non-arm’s length expense (NALE) provision introduced in 2019 worked appropriately for SMSFs and small APRA funds.

“We will continue to advocate for further legislative amendments to address the punitive approach of taxing realised capital gains that may have been impacted by a non-arm’s length capital expense. Trustees should, in certain situations, be given the opportunity to remedy the situation.

“We would also like to think there is scope for a measured and pragmatic approach, for example applying a proportionate approach rather than treating the entire capital gain as NALI.”

Burgess said the shortcomings still evident with the NALI rules should not detract from the legislative gains achieved.

“The recent amendment to the NALI rules that has now removed the potential for NALE to be applied retrospectively is commendable.

“Before these recent amendments it was possible that expenses incurred before 1 July 2018 could result in the application of the non-arm’s length expense rules.

“Despite the Bill predominately focusing on general expenses, from what we can ascertain the amendment to remove retrospectivity also applies to specific expenses incurred before 1 July 2018.

Burgess also used his keynote conference address to renew the Association’s call for sensible amendments to the Better Targeted Super Concessions Bill.

“It’s critical that the Parliament pass amendments that uphold the fundamental principles of our tax system,” he said.

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