Super balances dodge a bullet as Government announces NALI/NALE changes
Published on: 22 Mar 2022
SYDNEY, 22 March 2022: A welcome announcement from Senator the Hon Jane Hume, Minister for Superannuation, Financial Services and the Digital Economy today flagged that the Government intends to make legislative changes to ensure the superfund non-arm’s length income and expense (NALI/NALE) provisions operate as intended.
The Tax Institute’s General Manager, Tax Policy and Advocacy, Scott Treatt, CTA, says, ‘This is a positive, proactive move by the Government. It addresses an unworkable part of our system and may save working and retired Australians millions.’
‘The issues at play here affect everyone – SMSF and APRA regulated funds. Had this not been addressed, the outcome could have been devastating for working families planning and saving for retirement. We commend the Government’s leadership on this issue,’ says Scott.
While we don’t have legislation at this time, the Government’s commitment to develop this as a priority in close consultation with the Professional Bodies and Industry Associations is a fantastic step.
Without this announcement, based on the ATO’s proposed administration, if your super fund inadvertently ran afoul of the NALI/NALE provisions, you would face an effective tax hike of more than 23%* on your combined remuneration and fund earnings, losing thousands of dollars.
‘The issue with these rules as they were, was that they were so easy to trigger that every member of every superfund, large and small, was at risk of running afoul of them. Plus, they meant that in some cases, we were taxing the retirement savings of Aussie workers at the same rate we tax our highest income earners and at a higher rate than large multinationals. Needless to say, today’s announcement is good news for all Australians,’ Scott says.
The problems came to light when the ATO issued a recent Law Companion Ruling which set out their interpretation of these provisions and proposed administrative approach which had far reaching implications for both APRA-regulated funds and SMSFs.
In December 2021, The Tax Institute lodged a submission to Treasury on behalf of the Professional Bodies and Industry Associations advocating for amendments to the NALI/NALE provision and laying out potential solutions.
The submission formed a major part of a combined push from the professional and industry bodies to advocate for change in the NALI/NALE system.
‘It took about 12 months of advocacy work and discussion to reach this much-needed intervention by Government. We commend them for recognising this risk and moving to address it. But the fact remains that this is just one of the areas where our tax system is massively inefficient. Our tax compliance costs are around $50 billion a year, due in no small part to our outdated and inefficient system. If we’re serious about economic prosperity for everyone, this needs to be just the first of many changes.’
Appendix A – About NALI/NALE rules
NALI/NALE rules are designed to deter super funds from pumping up members balances through special deals giving excessive income or not charging expenses. However, these rules could be breached by super funds performing very common activities, such as:
- in-house bookkeeping or auditing activities performed for low or no fees
- services being provided to funds with little or no mark up by entities owned by the fund (common for industry funds)
- trustees being required to act in the best financial interests of their members by choosing a lower cost option (a requirement of the law for trustees)
These common actions, if found to be in breach of NALI/NALE, result in a higher tax rate (15%-45%) being applied to not only the income generated by the activity, but potentially all future income and profits of a super fund.
Appendix B − Example: How NALE works
A member of an SMSF is a qualified plumber with a plumbing business. The SMSF holds a residential rental property. The member undertakes a renovation of the bathroom in the property and charges only the cost of materials. As a result of the renovation, the managing estate agent suggests the rent should be increased by $50 per week.
The ATO’s current view is that not only is all rent forever subject to NALI tax at the top rate of 45%, but the whole of the capital gain on disposal of the property in the future is also subject to the NALI tax rate of 45%.
Appendix C – Professional Bodies and Industry Associations
The Professional Bodies and Industry Associations are: Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants, The Tax Institute, the SMSF Association, the National Tax and Accountants Association, Australian Institute of Superannuation Trustees, the Actuaries Institute, Self-Managed Independent Superannuation Funds Association, the Financial Planning Association of Australia, Tax & Super Australia.
*Based on the average Australian worker with an income of around $90,000 and super balance of $135,000.
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