SMSFs face being nailed by 225% penalty for NALI breaches

Mike Taylor

Managing Editor/Publisher, Financial Newswire

25 January 2023

Superannuation funds which fail to abide by the rules around non-arms-length investment (NALI) rules will face a 225% tax penalty under new arrangements being proposed by the Australian Taxation Office (ATO) and currently the subject of Government consultation.

The Treasury has launched a consultation process around the NALI proposals making clear that the intention is to create a significant disincentive for funds to breach the rules.

The proposed legislative change is aimed squarely at self-managed superannuation funds (SMSFs) and small APRA funds (SAFs).

The Treasury documentation said that, under the potential amendments, where SMSFs and SAFs have breached the NALI provisions for general expenses that are linked to all fund income, the amount of fund income treated as NALI in relation to that breach would be subject to an upper limit.

“The maximum amount of fund income which would be assessable as NALI in relation to a particular general expenses breach would be calculated by applying a factor of 5 to the difference between the amount that would have been charged as an arm’s length expense and the amount that was actually charged to the fund,” it said.” This would partially break the link between the general expenses breach, and the income of the fund as a whole for the purposes of NALI.”

“At the current highest marginal tax rate of 45 per cent, a maximum effective tax rate of 225% (5 multiplied by 45%) would be applied to the general expenditure breach,” the consultation paper said.

It said the potential amendments are “intended to maintain the disincentive for SMSFs and SAFs to use non-arm’s length arrangements to circumvent the superannuation contribution caps through related party dealings as funds would be demonstrably better off in complying with NALI rules”.