Accountants hit by 45 per cent penalty tax on superannuation

This article was current at the time of publication.

CPA Australia is arguing that a 2019 tax amendment aimed at curbing people from circumventing superannuation contribution caps be repealed.

The  non-arm’s length income provisions (NALI), found in Section 295-550 of the Income Tax Assessment Act 1997) have far-reaching consequences for professionals and tradespeople alike.

Accountants, along with solicitors, real estate agents and tradies, are at risk of copping a 45 per cent penalty tax on their super funds if they apply their professional skills to personal tasks, such as completing returns for their self-managing superfund (SMSF). 

“Yet someone who is not a tax agent who completes and submits their [own fund’s annual] return would not be penalised,” notes Richard Webb, CPA Australia’s Policy Adviser Superannuation and Financial Planning, in a recent With Interest podcast.

It’s not just accountants; plumbers who undertake bathroom renovations on investment properties owned through their SMSFs can also be caught out.

As Webb notes, the provisions don’t only affect SMSFs; penalties could be applied to APRA-regulated funds for seemingly trivial admin costs. 

He says: “We know now that something as innocuous as a trustee of a fund failing to indemnify an expense to an APRA-regulated fund would make the entire income of that fund subject to the non-arm's length tax rate, which is 45 per cent. 

“And there are no materiality thresholds, by the way, so this could be something like a few dollars’ worth of photocopying.”

CPA Australia, along with several professional bodies, recently took their concerns to the public, issuing a joint statement about the potential damage to super balances for those who use their professional skills to assist their retirement fund. 

The government has acknowledged issues with the amendment and in January 2023 issued a consultation paper proposing the following changes: SMSFs and small APRA funds would be subject to upper limits of five times the level of the general expenditure breach, while large APRA funds would be exempt from NALI provisions for general expenses.

While welcoming government and regulator engagement, CPA Australia has rejected these proposals as “messy”, with the probability of fracturing the tax regime into two distinct sections.

Webb also notes: “Additionally, because APRA-regulated funds would continue to be subject to the non-arm's length expenditure rules for specific expenses, while being exempted for general expenses, it will mean that different rules will apply if conducting transactions with different related entities.

“For example, the way an APRA-regulated fund which conducts business with a related investment entity will be more tightly scrutinised than their interactions with related administration entities, and that is suboptimal for a variety of reasons. 

“The proposal to cap tax on non-arm's length income at five times the amount of the breach still means that a breach is subject to a tax rate of up to 225 per cent. 

“We still think that this is disproportionate and requires unnecessary trustee paperwork for small expenses. 

“It also doesn't resolve the issue of specific expenses, which remain unaddressed and are still a problem.”

Instead, CPA Australia is calling for the amendments to be repealed, arguing that current legislation (covered in the current in the current version of tax ruling TR 2010/1, with additional safeguards in Section 109 of the SIS Act) will deal with concerns about non-arm’s length dealings.

Watch this space.