The brief outlines what the Tax Institute considers to be key priorities out of the extensive list of unenacted measures from the previous government.

Amendments to NALI provisions

It listed amendments to the non-arm’s length income (NALI) provisions as one of the highest priorities for the Labor government.

“The government should consider prioritising legislative amendments to the NALI provisions to ensure they operate as intended, removing the current unintended consequences,” it stated.

The report explained that the NALI rules can be triggered by ordinary and low-risk activities that are likely to impact superannuation funds of all sizes.

“Impacted funds would be subject to tax at penalty rates that could potentially be applied to all current and future earnings of the fund, including capital gains,” it warned.

“The imposition of additional tax at rates of up to 45 per cent on contributions, fund earnings and gains means that every member of every superannuation fund, large and small, is at risk of having their superannuation balances significantly reduced if the potential impact of these rules is not fixed.”

The brief noted that while there is currently a safe harbour provided by the ATO in PCG 2020/5, this is merely a temporary measure and does not resolve the problems for funds and their auditors.

“This issue cannot be addressed by the ATO through administrative practices as it is an inherent feature of the NALI provisions. Accordingly, a legislative amendment is required,” it stated.

Reforms to penalties for SG non-compliance

Addressing superannuation guarantee (SG) non-compliance was also listed as a high priority.

The report noted that employers who are late by just one day in lodging or failing to lodge an SG statement are imposed with a penalty equal to 200 per cent of the SG charge under Part 7 of the SGAA.

“The ATO has the discretion to remit the Part 7 penalty in full or in part (although this may be limited in some cases) as part of the assessment of the penalty (the original assessment stage) or after the penalty is assessed (through an objection decision),” it stated.

“Employers who pay SG contributions one day late and fail to report this to the ATO are treated the same as an employer who deliberately evades their obligations to their employees.”

The Tax Institute said the government should consider undertaking legislative reform by introducing an enabling bill to amend section 59(1) of the SGAA to reduce the maximum Part 7 penalty so it aligns with penalties imposed under the Fair Work Act 2009.

The government should also look at amending section 31 of the SGAA to calculate nominal interest from the first day of the quarter in question until the date the contribution is received in the employee’s superannuation account, it stated.

“The SG charge regime should encourage employers to comply with their obligations and disclose historical non-compliance,” the brief explained.

“The integrity of the tax system would be enhanced by a fairer penalty system that reduces barriers for employers to comply with their current, and rectify outstanding historical, SG obligations.”

Relaxing the residency requirements for SMSFs

Relaxing the residency requirements for SMSFs is another priority, the Tax Institute stated.

The brief explained that circumstances such as the COVID-19 pandemic have resulted in some SMSFs or small APRA-regulated funds becoming non-residents for tax purposes as the trustees or active members have been unable to return to Australia.

Currently the trustee functions for SMSFs may be performed outside Australia for a maximum of two years where the trustee temporarily relocates overseas, it stated. Where a trustee remains overseas due to circumstances outside their control, the fund will breach this condition and become a non-resident for tax purposes.

“The former Government announced that it would relax the residency requirements for SMSFs by extending the central management and control test safe harbour from two to five years in addition to removing the active member test for SMSFs and small APRA-regulated funds,” it noted.

“The proposed changes to the central management and control criteria would allow SMSF trustees to continue to manage their superannuation funds while temporarily overseas, which is appropriate given the improvements in telecommunication channels.”

Two-year amnesty measure for legacy pensions

The Tax Institute also recommended that the government consider implementing the two-year legacy pension amnesty but listed it as a lower priority.

The measure would allow individuals to exit a specified range of legacy retirement products, together with any associated reserves, for a two-year period. This would enable the conversion of market-linked, life-expectancy and lifetime products into an account-based pension.

“The succession issues associated with these types of legacy pension products is unnecessarily complex and results in unfair outcomes to beneficiaries of the death benefit,” the brief stated.

The Tax Institute also outlined measures which it believes should be abandoned, including the the three year audit cycle.

The brief warned that this measure would “heighten the risk of increased non-compliance as less frequent monitoring of the fund’s activities from an audit perspective would provide opportunities for breaches of the superannuation rules to go undetected for longer periods”.

The measure, which was announced back in 2018, would have allowed SMSFs with a good compliance history to receive audits every thee years instead of annually. The proposal received considerable backlash from the SMSF industry.