NALI “shortcomings” still to be addressed: SMSFA

The chief executive of the SMSF Association (SMSFA) has told attendees at its Technical Summit in Sydney that while the recent amendments to the non-arm’s length income (NALI) Bill are welcome, “shortcomings” still remain to be addressed.

Peter Burgess said while the passing of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 provided some “much needed relief and certainty” regarding general expenses, there was still work to be done when applied to specific fund expenses.

He said certain issues related to the application of NALI rules to more specific expenses has become the top priority in government engagement and discussions to ensure the the non-arm’s length expense (NALE) provision introduced in 2019 is also appropriately applied for self-managed super funds (SMSFs) and small APRA funds.

“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?” he said.

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

“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.”

However, Burgess also emphasised the significant progress made so far with the passing of new legislation.

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

“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.”