ATO’s views on the treatment of ‘general’ expenses sounds alarm bells for accountants
The EM to the Bill makes it very clear that, for non-arm’s length expenditure to trigger the application of the NALI provisions, the relevant expenditure must be able to be attributed to particular amounts of income. Specifically, paragraph 2.38 of the EM provides the following guidance to the NALI provisions, as amended:
“Where there is a scheme that produced non-arm’s length income by applying non-arm’s length expenses, there must also be a sufficient nexus between the expense/s and the income, that is, the expenditure must have been incurred ‘in’ gaining or producing the relevant income. This reflects the analysis that must be undertaken in determining whether an expense is deductible under section 8-1, or can be included in the entity’s cost base for the transaction if the expense is of a capital nature”
The EM goes on further to say that once the relevant income has been identified and treated as NALI accordingly, other income of the fund would not be considered NALI. However, in LCR 2019/D3, the ATO has taken a far more aggressive approach to the non-arm’s length expenditure rules than appear to have been contemplated by Parliament when the new rules were introduced, particularly in regard to ‘general’ expenses incurred by a superannuation fund (i.e., expenses that cannot be attributed to a particular amount of income).