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.
The EM to the legislation provides examples of where either an SMSF’s expenses are less than what would have been incurred had the parties been dealing at arm’s length, or there is no loss, outgoing or expense incurred by the SMSF where some would have been expected if the parties had been dealing at arm’s length. In these situations, the income earned by the SMSF is treated as NALI and taxed at the highest rate.
In short, the bill clarifies the operation of Subdivision 295-H to make sure that SMSFs and other complying superannuation entities cannot circumvent the NALI rules by entering into schemes involving non-arm’s length expenditure (including, as noted, where expenses are not incurred). Readmore
