For those operating a Self-Managed Super Fund, the Australian Tax Office has released new rulings relating to an increased focus on tax treatments surrounding ‘Non-Arm’s Length Income’ (NALI) and ‘Non-Arm’s Length Expense’ (NALE) transactions.
Under legislation, ‘Non-Arm’s Length Income’ transactions are defined as income received that has been derived by an SMSF on terms not consistent with standard commercial/market rates. This includes such situations as where an SMSF leases a commercial property to a related party tenant at a below market rate of rent.
Similarly, ‘Non-Arm’s Length Expense’ transactions are determined to be expenses incurred by the SMSF that is at a lower rate than expected per standard business practices.
Examples of such expense transactions can include:
- A SMSF Trustee is a builder by trade and undertakes a renovation to an investment property owned by the SMSF for no charge
- A SMSF Trustee is a licensed plumber and provides plumbing services for the investment property owned by the SMSF at a discounted rate
Following consultation across multiple financial years, the ATO has considered previous interpretations of the Income Tax Assessment Act 1997 too broad, resulting in the introduction of necessary companion rulings to legislation.
Under the Companion Ruling (LCR2021/2), NALI tax rates could be applied to SMSF income where income was more than at a commercial rate, and where expenses are incurred at less than commercial rates or not incurred at all (i.e. NALE).
As a result, any income derived by an SMSF that is considered NALI or because of NALE will be taxed at the top marginal tax rate of 45%, rather than the concessional tax rate of 15% which applies to income within a Self-Managed Super Fund.
Coinciding with this, the ATO has also announced the amendment of ‘PCG2020/5’ to extend their “no compliance” approach related to SMSF expenditure of a general nature for a further 12 months, with the extension being provided until 30 June 2023.
What Does This Mean?
The extension of the transitional approach applied to general nature expenditure, allows SMSFs a further opportunity to ensure compliance with legislation and ATO guidelines. These Funds now have a further 12 months to minimise the risks of the provisions applying and ensure appropriate documentation exists to confirm that all dealings are at arm’s length particularly services that may give rise to a general expense risk.
It is important to note that this compliance approach does not apply where the SMSF incurred non-arm’s length expenditure directly related to the SMSF deriving particular ordinary or statutory income.
Furthermore, where failure to comply extends beyond the leniency deadline, the ATO will actively pursue non-compliance and penalise SMSFs via the 45% marginal tax rate to the Fund.
For More Information
For more information on the new SMSF legislation taken effect and the differentiation between NALI vs. NALE transactions, please contact the Archer Gowland Redshaw office on (07) 3002 2699 | info@agredshaw.com.au.
