Association CEO Peter Burgess says although it is good to get clarity on this important issue for the SMSF sector, it’s 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.

“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.”

Burgess says: “We will continue to consult with the ATO before this determination is finalised to get more clarity on why alternative views are being overlooked.”

Burgess adds that the examples provided by the ATO only cover scenarios where an accumulation fund has acquired an asset on non-arm’s length terms. To illustrate the broader application of the NALI rules it would be useful to also see examples where an SMSF incurs a non-arm’s length capital expense such as a property improvement and where an SMSF is paying a retirement phase income stream.