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Law Council of Australia

Legal Practice Section

Non-Arms Length Expense Rules for Superannuation Funds - Consultation

The submission to the Treasury in relation to the Consultation paper on ‘Non-arm’s length expense rules for superannuation funds’ (Consultation Paper) published in January 2023, was prepared by the Superannuation Committee of the Law Council of Australia’s Legal Practice Section (the Committee).

The Committee broadly agrees with the noted observation of other industry stakeholders that the non-arm’s length income (NALI) and non-arm’s length expenditure (NALE) provisions have the potential to operate so that there are disproportionately severe outcomes for breaches of the rule. The Committee also agrees that the impact is particularly severe in relation to general expenses of superannuation funds, where there is an onerous compliance burden placed on funds.

The Committee considers that there is limited comfort provided by the Commissioner’s Law Companion Ruling 2021/2 (LCR 2021/2) requiring large superannuation funds to have ‘appropriate internal controls and processes in place’, and ‘reasonable attempts to have been made’ for determining arm’s length expenditure in the case of self-managed superannuation funds (SMSFs).

The extent of compliance resources that will need to be devoted to the NALE provisions is evident from LCR 2021/2: for example, for expenses charged to or by related parties on a cost-recovery basis, trustees will need to ensure that they have evidence to ‘justify’ those charges as being arrived at on ‘commercial terms’ within the overall context of the business operations of the fund and the related-party service provider.

Further, as the Committee understands LCR 2021/2 statements as to how the Commissioner proposes to limit the direction of compliance resources, the transitional compliance approach will only apply to general expenditure incurred prior to 1 July 2023. It is noted that, pursuant to Practical Compliance Guidance 2020/5 (PCG 2020/5), the NALE provisions will commence with full effect, including with respect to general expenditure, from 1 July 2023.


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