Understanding the New Non-Arm's Length Expenditure Rules
Determining when a scheme might be flagged by the updated non-arm's length expenditure rules remains a critical consideration.
If a fund is involved in a scheme where it incurs less expenditure than expected, or even none at all, compared to what would be typical in an arm's length transaction, it could raise concerns. This expenditure could be either revenue or capital-related.
The Explanatory Memorandum (EM) accompanying the Bill acknowledges the challenge of pinpointing an exact "non-arm's length" price. It recognizes that an "arm's length" price can vary within a range of commercial prices. In certain cases, a discounted price or favorable terms offered to a compliant superannuation fund might still be considered "arm's length." For instance, if a party operates on a cost-recovery basis for specific services but can justify it commercially due to economies of scale from providing other services.
It's crucial to be able to identify a specific amount of ordinary or statutory income as Non-Arm's Length Income (NALI). When a scheme results in NALI due to non-arm's length expenditure, there must be a clear link between the expenses and the income. This means the expenses must have been incurred in generating or producing the relevant income. This requirement aligns with the analysis needed to determine if an expense is deductible under Section 8-1 or can be included in the entity's cost base if it's of a capital nature.
These legislative measures ensure that the repercussions of income being deemed NALI are confined to that specific income and any associated deductions.
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