Following the passing of changes to non-arm’s length expenditure (NALE) rules through Parliament on 25 Jun 2024, the Australian Taxation Office (ATO) has finalised its Taxation Determination TD 2024/5 (previously Draft TD 2023/D1).

The TD is fairly mechanical in nature and goes into some detail as to how non-arm’s length income (NALI) is calculated under the capital gains tax (CGT) rules and method statement. This includes that:

The cost base of assets that trigger NALI, can be increased by the market substitution rule (eg where an asset is acquired for less than market value) – therefore reducing the amount of NALI tax
NALI capital gains are eligible for the 1/3 CGT discount (ie as a result of calculating net capital gains)
NALI capital gains are reduced by capital losses and carry forward capital losses

The TD also has a reference to the ATO’s view that an undervalue transfer (that triggers NALI) will not be treated as a contribution unless there is evidence that supports that was the intention. This is a consistent position with LCR 2021/2, as discussed here.

The TD does not set out the how NALI is triggered in a capital gains context. Rather, that is set out in LCR 2021/2 and TR 2006/7. This includes, that there is no proportionality in the application of NALI. For example, by paying $100 less than the market value to acquire an asset, or not incurring a $100 expense in relation to an asset, can taint the entire net capital gain from the disposal of that asset. So, if the net capital gain was $500,000 – tax of $225,000 is triggered for the failure to pay a $100 expense.

This can be contrasted to the new NALE rules, applicable to non-allocated expenses, which only apply NALI to the discount × 2. So, the NALE/NALI tax, on $100 of non-allocated expense would be $95.

For further information please contact:

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Terence Wong
Senior Associate
T +61 3 9611 0112 l M +61 0458 846 022
E twong@sladen.com.au