The federal government’s non-arm’s-length income (NALI) measure under its Superannuation Taxation Integrity Measures is reasonably non-controversial from a legislative perspective and will become law, according to an SMSF expert.
Chartered Accountants Australia and New Zealand superannuation leader Tony Negline said he expected the measure to pass through Parliament and warned advisers to keep this on their radar and begin planning for their clients now if they believe it will apply to them.
Negline told a FIIG Securities Expert Series webinar today if passed, one of the new laws will require that where the right to income from a fixed trust is acquired on a non-arm’s-length basis, that income will be included in a super entity’s non-arm’s-length component and taxed at the top marginal rate.
“If you have any of those transactions, you’ve acquired units in a unit trust in your fund for a discount firstly or you think you may have expenses in your fund that are not based on an arm’s-length basis, talk to your advisers about that because you may find already in this financial year you may be one of the people who is earning income on a non-arm’s-length income rate,” he said.
“So I’m expecting that there will be a not a very large number, but a larger number than people actually expected to occur will actually be pinged by this particular rule.
“It’s not a nice rule.”
The NALI rule applies to a very small number of SMSFs, with less than 50 out of around 600,000 SMSFs in total paying NALI, according to ATO statistics, he said.
He was asked by webinar attendees if there is a problem for a fund should it lend money at market interest rates to one of its members.
“Yes, there is a problem,” he responded.
“And that is a problem in that you are giving what is called financial assistance to a member of the fund and that is actually not allowed even if it is at market rates, unless you want to get pinged by the ATO and pay lots of penalty tax.”
The other rule under the government’s NALI measure is that non-arm’s-length expenses incurred by super entities in gaining or producing assessable income will result in such income being included in the entity’s non-arm’s-length component.
This means the income will be taxed at the top marginal rate whether the expenses are of a capital or revenue nature.
