New NALE rules, AFCA's super powers passed

Two separate laws that regulate how superannuation funds deal with non-arm's length expenses (NALE) and income (NALI) and expands the Australian Financial Complaints Authority's (AFCA) remit over super passed Parliament on June 25.

Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, which contains the new laws governing non-arm's length expenses of superannuation funds and other pieces of legislation, passed both houses of Parliament.

Currently, NALE rules apply to all complying superannuation entities. Under the new law, these will no longer apply to large APRA-regulated funds, exempt public sector superannuation funds, pooled superannuation trust (PSTs), and approved deposit fund (ADFs). Self-managed funds and small APRA-regulated funds, however, are not fully exempt.

For SMSFs and small APRA-regulated funds, the new legislation means the amount of NALI taxed at the highest marginal tax rate is twice the difference between the amount that would have been expected to incur for a general expense at arm's length, and the amount actually incurred, with no deductions applying against that amount.

"However, the fund's total non-arm's length component cannot exceed the fund's assessable income minus deductions, excluding assessable contributions and deductions against them," the bill states.

Additionally, NALE rules will not apply to expenses incurred or expected to have been incurred before 1 July 2018. The previous law allowed the application of NALE rules relating to income derived in 2018-19 and later years.

Previously, if a fund incurred expenses on a non-arm's length basis that were lower than if it was in an arm's length context, then a portion or all the super fund's income would be classified as NALI and taxed at the top marginal rate of tax (45%).

On 1 July 2018, the government mandated the laws change to focus on a super fund's expenses as well as their income.

"The 1 July 2018 changes seemed harmless enough until you realised they could be applied to very common fund arrangements," Heffron Solutions head of education and connect Lyn Formica said in the lead up to the proposed changes.

"For example, an SMSF trustee undertaking a renovation on the fund's property and not charging the fund for their labour. Or administrative services being provided to APRA regulated funds at discounted rates."

Formica said that ever since the July 2018 changes, the industry has been lobbying for change but seemed to have "fallen on deaf ears".

That is until yesterday, in which the Association of Superannuation Funds of Australia (ASFA) chief executive Mary Delahunty welcomed the changes she described as "sensible revision".

"This change properly reflects the practices of superannuation funds when services are provided at a less than market rate. In effect the revision re-balances an integrity measure to reflect the associated risks," she said.

"The amendments remove a potential risk to the retirement savings of millions of Australians; and follow ASFA's advocacy based on extensive consultation with industry over several years.

"The revised rules acknowledge that large funds are unlikely to gain a tax advantage by engaging in schemes with related parties to incur expenses at less than arm's length, for example, a trustee or wholly owned investment entity providing services to the fund."

Elsewhere, the legislation affirmed that a complaint relating to superannuation can be made to AFCA even if the complaint does not meet the definition of a "superannuation complaint".

Section 1053 of the Corporations Act sets out several definitions for a superannuation complaint. This includes the trustee making a decision relating to a particular member or beneficiary (or particular former member or beneficiary) that was unfair or unreasonable; or an insurer making a decision under an annuity policy that is deemed unfair or unreasonable.

AFCA's remit has now been expanded on the back of a Federal Court ruling in a MetLife case whereby the super complaint did not meet the definitions of section 1053 and thus was outside of AFCA's jurisdiction.

In the case, MetLife issued a policy to a super fund trustee under which MetLife would pay a benefit to a member after satisfying the definition of total and permanent disability.

In 2018, a member named Brian Edgecombe lodged a complaint with AFCA for non-payment of such benefit.

MetLife contended that AFCA did not have jurisdiction to deal with the complaint, whereas AFCA believed that it did. The court unanimously sided with MetLife. While the court acknowledged it must consider the purpose of the powers given to MetLife, that consideration "must begin and end, however, with the statutory text."

The new law will take effect on the day after Royal Assent.

This means that if a superannuation-related complaint had purportedly been made to AFCA prior to commencement of the new law and that complaint was made outside AFCA's jurisdiction as a result of the MetLife decision, that complaint is now taken to be valid within AFCA's general remit, the Explanatory Memorandum notes.