The Australian Taxation Office (ATO) has announced that it has updated Practical Compliance Guidance, PCG 2020/5 – Applying the non-arm’s length income provisions to ‘non arm’s length expenditure’ to extend their compliance approach by another 12 months to 30 June 2023.
Prior to the Federal Election we saw the Senator Jane Hume announce that the Government would commit to making amendments to the NALI provisions contained within section 295-550 of the ITAA 1997 to ensure that the non-arm’s length expenditure (NALE) rules operate as intended:
The non-arm’s length expense provisions are designed to prevent superannuation funds from circumventing contributions caps, and artificially inflating fund earnings through non-commercial dealings. The Government understands that some industry stakeholders have concerns regarding the interpretation of these provisions by the Australian Tax Office in a recent Law Companion Ruling and the implications of this ruling for both APRA-regulated funds and SMSFs.
Following on from this announcement, the ATO did not intend to extend the existing relief in PCG 2020/5 beyond 30 June 2022.
However, with a change of Government, rectification of this matter was unlikely by the end of the financial year, meaning that the Commissioner has now updated the Practical Compliance Guidance by a further 12 months.
This means that the ATO won’t allocate compliance resources in the 2022–23 financial year to determine whether the NALI provisions apply to all the income of the fund, where it incurs non-arm’s length expenditure of a general nature on or before 30 June 2023. This extension provides a greater level of certainty on the ATO’s administrative approach whilst they assist affected funds to manage the issue, whilst the industry continues to work with Treasury on creating a workable solution within the tax laws.
It is important to remember that this relief does not extend to arrangements where a fund incurred non-arm’s length expenditure directly related to the fund deriving particular ordinary or statutory income.
The Appendix in LCR 2021/2 Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement has also been updated to reflect the change to PCG 2020/5.
This is just one of many topics that we will be exploring as part of the SMSF Day events around Australia between 14 July – 3 August 2022.