The non-arm’s length expense (“NALE”) rules for complying superannuation entities were introduced with effect from 1 July 2018.
The rules complemented the non-arm’s length income rules which result in fund income being taxed at 45% where it is derived from non-arm’s length dealings and in excess of what it would have been under an arm’s length arrangement.
The NALE rules expanded the scope of the rules to deal with arrangements involving the reduction of super fund expenses.
In January 2023, Treasury released a Consultation Paper considering potential reforms to the non-arm’s expense rules for superannuation funds.
This was in response to the significant concerns raised with the ATO’s interpretation of the rules in LCR 2021/2.
In particular, the ATO took the view that a “general expense” of a super fund had a relevant nexus to all the fund’s income such that a breach of the rules involving a minor amount of expenses saved at the fund level could result in its entire income being taxed at 45%.
In the Consultation Paper, Treasury proposed introduced an exception for large APRA-regulated funds for “general expense” breaches, as well as a cap for other funds limiting the amount of income taxed at 45% to five times the amount of the breach (or effectively a 225% tax rate on the amount of the breach).
In our response to Treasury, we submitted that we did not agree with either of the proposals in the Consultation Paper. Instead, Pitcher Partners proposed a review of the NALE rules in their entirety and suggested expense type breaches be treated as contributions to the fund instead of resulting in fund income being taxed at 45%.
Additionally, Pitcher Partners suggested a statutory de minimis to reduce compliance costs and ensure that minor breaches would not result in severely disproportionate outcomes.
You can read our submission below.
You can find out more about our advocacy work on the website here.