Non-arm’s length income (NALI) determinations from the ATO must crop up now and then in SMSF trustee nightmares, particularly in regard to LRBAs. While the NALI provisions are an accepted anti-avoidance measure designed to stop income that would otherwise attract the top marginal tax rate being directed to an SMSF, they are coming under more and more scrutiny from the regulator due to the tax revenue potentially skirting legitimate collection.
In this regard, trustees and practitioners should note that there is new legislation that seeks to draw even tighter the operating rules on NALI with a focus on the expenditure side of transactions.
Treasury Laws Amendment (2018 Superannuation Measure No. 1) Bill 2019 has now passed both houses of Parliament. This amends NALI provisions in the income tax law to specifically include non-arm’s length expenses. Note that LCR 2019/D3 and PCG 2019/D6 will aid understanding of the new rules greatly.
Example 1 – non-arm’s length expenditure was incurred to acquire an asset – NALI 19. During the 2019–20 income year, Joe holds commercial property with a market value of $800,000. During the income year, he sells the commercial property to himself acting as trustee of his self-managed superannuation fund (SMSF) for $200,000. The SMSF leases the property to a third party. 20. For the purposes of proposed subsection 295-550(1), the scheme involves the SMSF acquiring the commercial property from Armin for an amount that is less than its market value. There is a sufficient nexus between the non-arm’s length expenditure incurred in acquiring that property and the rental income the SMSF derives from leasing the property for the rental income to be NALI. Further, there will be a sufficient nexus between the non-arm’s length expenditure and any capital gain derived on the disposal of the property for the capital gain to be NALI.
Example 2 – non-arm’s length expenditure incurred has a nexus to all income of the fund – NALI 21. For the 2020–21 income year, Mary as trustee of her SMSF, engages an accounting firm, where she is a partner, to provide accounting services for the fund. The accounting firm does not charge the fund for those services. 22. For the purposes of proposed subsection 295-550(1), the scheme involves the SMSF acquiring the accounting services under a non-arm’s length arrangement. The non-arm’s length expenditure (being the nil amount incurred for the services) has a sufficient nexus with all of the ordinary and statutory income derived by the SMSF for the 2020–21 income year. As such, all of the SMSF’s income for the 2020-21 income year is NALI.