Upcoming changes to NALI provisions

The federal government has recently flagged making changes to non-arm's length inomce (NALI) provisions that were recently enacted in 2018. The 2018 amendment changed the operation of the NALI rules to include a situation where an SMSF would not pay an expense on arm's length terms.

An unintended consequence of the 2018 law change was that all income of an SMSF would become NALI, and taxed at the top marginal tax rate, if a general expense was not paid at arm's length.

The Federal Budget announcement proposes a change to the rules where NALI income would be limited to 2 times any general expense that is not paid at arm's length.

Examples of the types of general expense include:

actuarial costs
accountancy fees
audit fees
costs of complying with a "regulatory provision" of the SIS Act
trustee fees and premiums under an indemnity insurance policy
costs in connection with the calculation and payment of benefits to members
investment adviser fees and costs in providing pre-retirement services to members, and
other administrative costs incurred in managing the fund.

Since the law was enacted in 2018, the ATO has released PCG 2020/5, which has been updated each year since. In the PCG, the ATO has stated that they will not apply compliance resources to applying the law to general expenses for the 2018–19 to 2021–22 income years inclusive.

Along with this compliance update, the Federal Budget announcement includes a proposal that the NALI rules will not apply to general expenses underpaid prior to the 2018–19 income year.

As the proposal is to change the legislation with an effective date of 1 July 2023, trustees must ensure that fund general expenses are adequately paid for.

In particular, SMSF trustees should pay particular attention where the fund members cannot make contributions into the fund.

Also, SMSF trustees must be reminded that there is no change to NALI rules where an expense relates to a specific asset. Where an asset becomes tainted due to the underpayment of expenses, the asset becomes tainted for the life the asset is held by the SMSF.

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