TD 2023/D1 outlines the ATO’s views on the interaction of NALI provisions in the Income Tax Assessment Act 1997 and the CGT provisions in the act to determine the amount of statutory income that is NALI where a capital gain arises as a result of non-arm’s length dealings.

According to SMSF Association chief executive Peter Burgess, while it is good to receive clarity on the issue, it is concerning that the draft ruling appears to be contrary to the industry’s understanding of how the NALI provisions are intended to work.

“The industry’s long-standing belief has been that where a capital gain arises because of non-arm’s length dealings, you only treat as NALI the net capital gain that relates to that particular CGT asset,” Mr Burgess said.

“By contrast, the view expressed by the ATO in draft TD 2023/D1 – how NALI and CGT provisions interact to determine the amount of statutory income that is NALI – is that the NALI capital gain can taint other capital gains incurred by the fund in the same income year.

“The NALI provisions may have evolved over the years, but we do not believe that it has ever been government’s intent to apply penalty tax rates to a genuine arm’s length capital gain.”

In a statement to SMSF Adviser, DBA Lawyers said the latest draft determination should remind SMSF trustees to be even more careful when dealing with non-arm’s length transactions.

“The new draft taxation determination shows that the ATO is focusing on non-arm’s transactions, including when they interact with the CGT provisions,” the firm said.

“In a practical sense, it is yet another reminder for SMSF trustees and their advisers to take extra care to ensure that both: all dealings are consistent with arm’s length dealings; and they retain contemporaneous evidence proving that all dealings are consistent with arm’s length dealings.”

DBA Lawyers also pointed to ATO guidelines on market valuations, adding: “When engaging in a business real property acquisition from a related party, or any real estate disposal to a related party, all SMSF trustees should give very strong consideration to obtaining a valuation report from a qualified independent valuer, where that report is consistent with the ATO guidance on market valuations.”

Daniel Butler, director of DBA Lawyers, told SMSF Adviser that the draft determination also highlighted the complexity of NALI and CGT interactions.

“The TD should be in the form of a ruling when finalised so that taxpayers have the ability to rely on it. Currently the draft TD only protects a taxpayer on interest but not primary tax,” Mr Butler said.

“Further, the ruling highlights the complexity of the interaction between not only NALI and CGT but also in respect of contributions. Numerous industry and professional bodies were seeking to have the NALI revised due to the complexity and uncertainty.

“Clearer legislation would overcome the need for an ATO clarification on this area as many advisers will be struggling in practice with the complexity involved.”

In June, Treasury opened consultation on Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non‑arm’s Length Expense Rules for Superannuation Funds to enact amendments to the NALI provisions that were announced in the 2023–24 budget.

The amendments to the NALI provisions will apply to expenditure incurred by superannuation funds, referred to as the non‑arm’s length expense (NALE) rules.