“It's already been five years of delay during which time a lot of professional bodies have provided input to Treasury, the government and the ATO to get this right,” Mr Butler said.

“As advisers, we must advise people on the state of the law today and that means that today, a $1 discount to a fund will technically taint the whole fund with a 45 per cent tax penalty; effectively blowing up the fund.”

Mr Butler said the delay in finalising the NALE legislation is exposing SMSFs and large super funds to substantial penalties.

He explained the transitional compliance approach where the ATO agreed not to enforce general expense NALE outlined in PCG 2020/5 expired on 30 June 2023, and although the ATO declared in early 2023 it would not extend PCG 2020/5 beyond 30 June 2023, the legislation has not been finalised, leaving funds exposed to the application of NALE to all ordinary and statutory income.

“It appears to be Treasury and the ATO's view in the legislation that any asset purchase lower than the market value is NALE, and therefore you have to be very careful because then you’re getting to the distinction between a specific NALI or specific NALE,” he said.

“And when it’s specific in relation to a particular asset or revenue source, there is no upper cap, it's just all income and any net capital gain from that asset is tainted. That's one of the dire consequences. Technically, a $1 discount could put you into NALI/E and then the asset is tainted for life. However, hopefully, the ATO is not going to worry about $1.”

Aaron Dunn, CEO of Smarter SMSF said the lack of clarity has seen market substitution rules being put in place.

“That's where we've started to see these market substitution rules come in, and being able to isolate if you are making it as part contribution under an allowable, acquirable asset, that you need to document that that is the case.

“Whereas previously, if it was a $100,000 off-market transfer of a listed share, for example, and you made 50,000 of consideration, well, the other $50,000 would simply be deemed to be a contribution in respect to that individual,” Mr Dunn said.

“Now, that's not the case unless you actually document it. Those market substitution rules would come in with the non-arm's length income requirements.”

Mr Butler said the ATO outlined in the revised TR2010/1 in 2021 that if a fund has a contract to purchase real estate and also acquire part by way of a contribution, it should express that in the documentation at that time as the ATO won’t accept it if it's for the whole asset, and if it's less than market value, it would be classified as NALE tainting that asset for life.

He said the impact of these changes being made to the NALI/E legislation not being finalised can have extreme consequences for SMSFs and, currently, even large APRA funds.

“In the end, the upper cap of two times the discount for general expense NALE is a welcome change but where we are at the moment is that the law has a gaping hole in it until the proposed change is finalised as law. In the meantime, we do not have clarity because the law will change and when it does, the general NALE upper cap will apply retroactively to 1 July 2018,” Mr Butler said.

“The soonest it can change, assuming the legislation is passed by the 31st of March, is 1 April 2024 and although the ATO’s practical compliance guidelines say they’re not applying compliance resources to a general expense NALE, that position reflected in PCG 2020/5 ceased on 30 June 2023, so does the ATO now apply the current law?”

Requests have been made to some professional bodies to extend the administrative relief in PCG 2020/5 to 30 June 2024.

The professional bodies also requested that the ATO be given the discretion to overlook honest and inadvertent errors as in the example of Trang the plumber in LCR 2021/2 who renovated the kitchen and bathroom of her fund’s rental property was probably a case in point where she innocently improved her fund’s property without knowing the law or the consequences.

“She has tainted that property for life but all humans make errors and the ATO should be able to show pity and overlook these types of cases,” Mr Butler said.

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