The Government has released a bill to extend the application of the non-arm’s length income (NALI) rules to income and capital gains gained or produced under arrangements involving non-arm’s length expenditure. The genesis of this measure was non-commercial limited recourse borrowing arrangement (LRBA) loans but the proposed legislation applies to all arrangements where there is non-arm’s length expenditure or costs and also to arrangements where assets are acquired for under market value consideration. Once NALI applies the income and gain from that asset is taxed at the highest marginal tax rate.
In relation to under market value purchases the explanatory memorandum (EM) to the bill contains a controversial example of the application of the new measure. In that example a public offer retail super fund acquires units in a unit trust via a broker for a substantially lower amount than in the promotional material. NALI is then applied to the income from the units and the capital gains from the sale of the units. For most commentators, such an arrangement would be considered arm’s length (assuming that the broker was able to get a “good deal” through its contacts and/or from the scale of the super fund’s investment).
The EM also contains the following useful commentary on the difficulties of determining arm’s length – “An ‘arm’s length’ price may be accepted to fall within a range of commercial prices. For example, loans may be available at different interest rates based on a range of factors. Accordingly, an SMSF may be able to apply an acceptable commercial rate of interest to a loan within a band of rates available to it on an arm’s length basis.” Hopefully, this comment will be taken on board by the Australian Taxation Office (ATO) given its hard line approach in proving arm’s length dealings.
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