Non-arm’s length expense rules for superannuation funds

The government has released a consultation paper considering options to amend the non‑arm’s length income (NALI) provisions which apply to superannuation funds.

While the NALI provisions are operating broadly as intended, the government appreciates some superannuation industry stakeholders have raised the potential for disproportionately severe outcomes for breaches relating to general expenses.

For the purposes of stakeholder consultation Treasury has developed potential policy changes to the NALI provisions, where they relate to general expenses which have a sufficient nexus to all ordinary and statutory income derived by the fund.

Potential amendments to the NALI provisions for superannuation funds could be adopted as follows:

• Self‑managed superannuation funds and small Australian Prudential Regulation Authority (APRA) funds would be subject to a factor‑based approach which would set an upper limit on the amount of fund income taxable as NALI due to a general expenses breach. The maximum amount of fund income taxable at the highest marginal rate would be 5 times the level of the general expenditure breach, calculated as the difference between the amount that would have been charged as an arm’s length expense and the amount that was actually charged to the fund. Where the product of 5 times the breach is greater than all fund income, all fund income will be taxed at the highest marginal rate.
• Large APRA‑regulated funds would be exempted from the NALI provisions for general expenses.

The potential approach outlined in the consultation paper seeks to balance maintaining the integrity of the tax system with providing a greater level of certainty for funds that the consequences of any breaches relating to general expenses would be proportionate to the magnitude of that breach and ensuring the rules are appropriately focussed.

The consultation process and any comments received in relation to the potential amendments outlined in this paper will help inform the development of future policy regarding the NALI provisions.