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Superannuation

Advocacy in action: NALI amendments before Senate Committee

Published: 15 Nov 2023

   

Julie Abdalla speaks at the Senate Hearing

Tax law can be complex and poorly designed law can compound that complexity. As advocates for the tax community, The Tax Institute makes dozens of submissions each year, frequently participates in consultation with government, and amplifies the voice of our members in consultative forums.

Our goal? Advocate for a tax system that is robust, fair and simple, for all Australians.

This week, The Tax Institute’s Senior Counsel - Tax & Legal, Julie Abdalla, FTI, appeared before the Senate Economics Legislation Committee in a hearing on the proposed NALI amendments contained in Schedule 7 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023. Julie appeared alongside representatives of other professional associations, including CA ANZ, CPA Australia, Institute of Public Accountants and SMSF Association (the Joint Bodies).

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The Joint Bodies have been advocating on this issue for years and had previously provided a submission on the topic, outlining concerns about creating a ‘two-tiered’ superannuation sector, the complex issues created by the interaction of the non-arm’s length income (NALI) and non-arm’s length expenditure (NALE) framework, and proposing a more effective long-term solution.

Julie gave the opening statement on behalf of the Joint Bodies. She said:

On behalf of Chartered Accountants Australia and New Zealand, CPA Australia, Institute of Public Accountants, SMSF Association and The Tax Institute, we thank the Senate Economics Legislation Committee for inviting us to appear as a witness at today’s public hearing.

The Joint Bodies are here today to provide our views and feedback on Schedule 7 to the Bill. In relation to schedules 1 and 2, we would like to see temporary measures that encourage businesses to invest in their growth become permanent features of our law. The Institute of Public Accountants would be pleased to take questions on these measures, time permitting. At this stage and in the interests of time, the Joint Bodies do not have comments on Schedules, 3, 4, 5, 6 and 8. We are happy to take any questions regarding the other schedules on notice.

Schedule 7 proposes to amend the non-arm’s length income rules contained in the Income Tax Assessment Act 1997 (the 97 Act).

The NALI rules were originally introduced to address schemes where superannuation funds entered into arrangements where they derived more income than they would under an arm’s length arrangement. The rules were amended in 2019 and those amendments were specifically stated to have been introduced in response to certain arrangements such as limited recourse borrowing arrangements.

However, well-established and effective compliance levers already exist within the taxation and superannuation compliance framework to address the types of behaviour which the 2019 amendments, and now Schedule 7, seek to address. Limited recourse borrowing arrangements effectively no longer exist in their previous form due to other legislative amendments and the ATO’s administrative approach which has been effective in addressing these concerns.

As we have requested in the past, we consider it vital that Treasury and the ATO provide evidence to demonstrate that the underlying concerns supporting the need for the 2019 amendments remain.

We have significant concerns that the rules operate beyond their intended policy scope, disproportionately impacting Australians compared to the mischief they were intended to discourage.

This includes:

  • the creation of a two-tiered system – as a general principle, we consider this introduces undue complexity into an already complex and highly regulated system, and lacks equity and sector neutrality;
  • the significant and disproportionate complexity and compliance costs imposed on SMSFs if the proposed provisions proceed as drafted;
  • the inability for impacted taxpayers to rectify if they make a minor error or honest mistake;
  • the disproportionate outcomes for minor expenditure resulting in the NALI rules being invoked, especially in relation to specific expenses; and
  • the need for legislative amendments to address the poor interaction between the NALI provisions and the capital gains tax provisions – the current CGT rules were not designed with the NALI provisions in mind, and they interact awkwardly and in a detrimental way for taxpayers.

The Joint Bodies are of the view that Schedule 7 should be removed from the Bill, and the 2019 amendments to the NALI provisions should be repealed.

We consider that the need for the rules in the current and proposed forms are not warranted or supported. We also note that if Schedule 7 is passed in its current form, further changes will be needed to address the outstanding operative issues and concerns. This is not a sensible or desirable outcome.

Rather, a more reasonable approach is to treat any amounts that are non-arm’s length expenditure as a contribution to the fund. This would ensure that excessive non-arm’s length expenditure is subject to the existing and rigorous excess contributions regime.

Integrity provisions have a valuable place in our tax and superannuation systems. However, they need to be balanced with the complexity they cause in administration and the costs imposed on impacted taxpayers. If they are not, serious, disproportionate, and long-lasting ramifications can result for those impacted by the rules.

Any remaining integrity concerns regarding non-arm’s length expenditure for SMSFs would be better addressed within the existing framework contained in section 109 of the Superannuation Industry (Supervision) Act 1993. Section 109 is an existing compliance mechanism that prohibits non-arm’s length dealings which, with minor amendments can provide the additional safeguards the Government is seeking, and allow the Commissioner to access a wider range of corrective mechanisms that are more proportionate.

Thank you. We are pleased to take questions.

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