Treasury has proposed that SMSFs would be subject to a factor-based approach wherein the maximum amount of income taxable at the highest marginal rate would be set at five times the level of the general expenditure breach.

Prior to the release of the consultation, professional bodies and industry had been hoping for a total overhaul of the NALI provisions which was not reflected in the proposals put forward by Treasury.

Given the lack of clarity in the rules between what is a specific expense versus general expense, DBA Lawyers director Daniel Butler said there is likely to be an increase in tax-related disputes in the future on whether general expenses should, where applicable, be split between general versus specific expenses.

Mr Butler noted that in LCR 2021/2, the ATO states that they generally consider accounting, audit, administration and investment adviser fees to be general expenses.

“[However] if you drill down further, was it really for the general fund or was it for the acquisition of a particular asset that the accountant, investment adviser or the lawyer worked upon?” he questioned.

“Those are the types of disputes that will arise.”

Mr Butler said some investments will occasionally need extra time from an investment adviser, accountant or auditor.

“[These professionals] will now have to be more specific with invoicing to ensure they categorise between general versus specific,” he stated.

Mr Butler noted that in the example in LCR 2021/2 with Sharon the real estate agent, Sharon’s real estate management fee was for a specific property. Trang’s renovation in Example 9 was similarly for a specific property too.

“There is inconsistency that’s coming in here and opportunity for issues to flare up,” he warned.

Mr Butler cautioned that fighting disputes involving NALI is particularly difficult due to the reverse onus of proof.

“The taxpayer has reverse onus and so not many taxpayers have ever won in a NALI dispute. It’s a hard gig to win and the cost, time and anxiety to defend a client is huge so be prepared,” he warned.

“The ATO being practical hopefully won’t be concerned about smaller amounts but [these rules can potentially] be applied at the smallest occasion.”