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Finance bodies warn taxpayers they may trigger huge penalties under non-arm’s length provisions and urge the government to change course.
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Repeal ‘perverse’ rules that put super at risk, Canberra told
24 February 2023
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“Perverse” rules are putting the superannuation of ordinary taxpayers at risk and should be changed as a matter of urgency, say a group of accounting and financial bodies.
In an unusual “Consumer warning” yesterday the group said tradies, real estate agents, accountants and solicitors were all at risk of triggering oversized penalties that would “plunder your super”.
The warning was part of a three-pronged attack on the non-arm’s length income (NALI) provisions and their mooted revision, which were both described as “unnecessary overreach” that “seeks to solve a problem that no longer exists” in a strident letter to Assistant Treasure Stephen Jones.
At the same time, the group’s submission said proposed revisions to NALI rules, released last month, were “unacceptable” and set out a “better long-term solution”.
The group, comprising CPA Australia, CA ANZ, IPA, IFPA, NTAA, the SMSF Association and the Tax Institute, said professionals “performing everyday tasks for their SMSFs are not performing those tasks to circumvent the contribution rules” but simply because it was easier and made commercial sense.
The “consumer warning” said the existing penalties could amount to a 45 per cent tax on every contribution to a super fund, adding up to thousands of dollars, and the rules “don’t hold up in the real world”.
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“The current rules prohibit transactions with related parties at ‘mate’s rates’ or no rate at all. Something as mundane as mistakenly using a work laptop to complete a personal task could trigger a breach.
“The rules could see an accountant penalised for completing their own super fund’s returns unless they charge for it. Yet someone who is not a tax agent who completes and submits their return would not be penalised.
“A real estate agent who chooses to sell an investment property owned within their super fund and doesn’t charge commission could also land themselves in hot water. The same may apply to a tradie who renovates or undertakes maintenance themselves and doesn’t bill their fund.”
“For an average Australian with an income of around $90,000 and super balance of $135,000, the inadvertent triggering of the NALI provisions by the superannuation fund results in an effective tax increase of $6,000 per year.”
But the group said the proposed changes were unacceptable and failed to address the core problems.
“The proposed penalty of five times for general expense breaches for SMSFs is extreme,” it said. “The difference between general and specific expenses will be very complicated and costly for all superannuation funds to administer.”
“It is our view that the government’s proposals will create considerable risk for many regulated superannuation funds and will lead to additional cost. The cost of imposing a requirement on trustees to determine an arm’s length shortfall amount, even if the shortfall amount is insignificant or even just a few dollars, does not warrant the type of approach being proposed in the consultation paper.”
It said the current NALI rules needed to be changed because they ran afoul of government policy and basic principles:
- They were contrary to their original purpose.
- They contravened the goals of “efficiency, equity and simplicity” in good law design.
- They conflicted directly with super funds’ best financial interest duty.
- They could result in a taxpayer being taxed more than twice for the same transaction.
- They went against government policy to reduce fees to super fund members.
- They sought to solve a problem that no longer existed.
The group said tax concessions for superannuation meant an anti-avoidance NALI provision remained necessary but offered a solution “which follows the principles of good law design yet also provides adequate safeguards and proportionate penalties”.
The letter and submission urged the government to tackle the situation by repealing the legal amendments in 2019 that brought it about.
“It is our view that the most ideal and workable and least disruptive solution would be for the 2019 amendments to s295-550 of the ITAA 97 [Income Tax Assessment Act 1997] to be repealed and returned to its terms before the amendments were enacted.
“Any residual concerns about non-arm’s length arrangements with any superannuation fund can be dealt with by the ATO and the superannuation sector applying Tax Ruling TR 2010/1 because TR 2010/1 says that if a superannuation fund trustee takes steps to improve the value of a fund investment on non-arm’s length terms (including using their own skills and resources), then in most cases the entire value of the improvement will be treated as a contribution.”
If necessary, the government could also amend the superannuation act “to prohibit trustees from conducting any transactions with any party other than on arm’s length terms”.
It said both SMSFs and APRA funds were checked by external auditors every year and if they uncovered a material breach of the superannuation act, it could be reported and a penalty applied by regulators.
“It is our understanding that the government has considered this alternative solution and we encourage you to revisit it,” the letter said.
“We believe this solution requires minimal law change and better meets the principles of good law design.”
“We believe that our suggested solution provides an effective outcome in place of the punitive and unacceptable outcomes that occur under the NALI provisions. That is, it will not give rise to unacceptable loopholes, therefore maintaining an appropriate level of disincentive from entering into non-arm’s length transactions.
“We are willing to publicly support the adoption of our suggested solution.”
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