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ATO should hold off on ‘unfair’ SMSF income rule, groups say
The Australian Taxation Office should postpone a decision about how non-arm’s-length-income and capital gains tax (CGT) provisions interact until after the government finalises changes to a key law, professional bodies representing the self-managed superannuation fund (SMSF), accounting and tax industries have urged.
In a joint submission to the ATO about its draft Tax Determination (TD) 2023/D1 – Income tax, the SMSF Association (pictured: CEO Peter Burgess), Chartered Accountants Australia & New Zealand, CPA Australia and the Tax Institute noted that Treasury is considering proposed changes to the Income Tax Assessment Act 1997 (ITAA) that will have implications for the ATO’s determination.
The professional bodies explained that they have been working with the ATO for years about provisions governing non-arm’s-length income and expenses (NALI/E) for superannuation funds and how they interact with capital gains tax provisions. But because Treasury is likely to amend the NALI/E rules and their final form is currently unknown, the ATO should wait to finalise the draft TD.
“If necessary, we request that, after the NALI/E provisions have been settled, the ATO republish the draft TD with suitable amendments as a revised draft before it is finalised,” they said.
The groups took issue with the draft TD’s focus on SMSFs, with examples dealing only with specific SMSF expenses. “We consider that examples involving large APRA-regulated superannuation funds would also be helpful.”
Also helpful, they said, would be the inclusion in the draft TD of examples as to how earnings would be treated under the NALI/E and CGT provisions for segregated and unsegregated pension assets. And, pointing out that SMSFs are largely barred from having a single trustee, the organisations said the ATO should adjust the examples, which apply to single trustees, “so they reflect the correct regulatory framework”.
“In the time available to us, we have not been able to determine that the approach outlined in the draft TD is not incorrect in allocating capital losses against capital gains in the taxpayer’s chosen manner for the purposes of calculating the non-arm’s-length and low-tax components,” the letter stated. “In any event, we believe that the irrelevance of the ability to choose the order in which capital gains are offset by capital losses… is not consistent with community expectations.
“This is a question of policy that needs to be urgently raised with Treasury.”
The professional bodies also took issue with the inability to disaggregate the net capital gain calculated under the method statement, saying it “interacts awkwardly” with the provision designed to identify NALI amounts and subject them to a higher tax rate.
“The effect of the single amount of statutory income being used for the purposes of section 295-550 [of the ITAA] is that arm’s-length capital gains are aggregated with non-arm’s-length capital gains in calculating the net capital gain under section 102-5 of the ITAA,” it stated. “This results in arm’s-length capital gains forming part of the non-arm’s-length component. This is a disproportionate outcome and unfairly taxes arm’s-length capital gains at a penal rate.”
The organisations also cited the “significant complexity” around determining the non-arm’s-length component under section 295-550, “taking into account its interaction with the method statement in section 102-5”.
Aside from the problems around the inability to disaggregate arm’s-length from non-arm’s-length capital gains, “taxpayers need to consider the operation of the market value substitution rules (MVSRs)” in two other sections of the ITAA, the operation of which is further modified by subsections relating specifically to NALI.
“The draft TD would benefit from further explanation and clarification regarding how the MVSRs affect the outcomes needed to correctly calculate the relevant capital gains,” the letter stated.
