The federal government today introduced a bill into Parliament in relation to non-arm’s-length income (NALI) rules to prevent SMSFs from inflating super earnings through non-arm’s-length dealings.
Revenue and Financial Services Minister Kelly O’Dwyer said the bill provides clarification to ensure that super entities cannot avoid the NALI rules by entering into schemes involving non-arm’s-length expenditure, including where expenses are not incurred.
Under the new law income of a super fund associated with expenses that are undervalued or carry no value at all, as a result of transactions not being conducted at arm’s-length, will be treated as non-arm’s-length income regardless of whether the expenses are capital in nature.
As a result the income in question will be taxed at the top marginal rate.
Under the current law, this remains unclear, and, as such, income may be taxed at the concessional rate for super entities.
Furthermore, under the new law, in circumstances where the right to income from a trust through a fixed entitlement was acquired on a non-arm’s-length basis, the income is included in a super entity’s non-arm’s-length component and will be taxed at the top marginal rate.
Under the current law it is unclear whether that income is included in a super entity’s non-arm’s-length component, and such income may be taxed at the concessional rate for super entities.
The government revealed the measure in the “Superannuation Taxation Integrity Measures” consultation paper in January, in which it said the amendment is intended to deny concessional tax treatment to income gained from a non-arm’s-length arrangement where fund expenditure is set below market rates.
This measure would reduce avenues for members to boost super savings in a way that is not included in the contribution caps.
Under the bill, expenses may be of a revenue or capital nature in the same way that non-arm’s-length income may be statutory or ordinary income.
Self-managed Independent Superannuation Funds Association managing director Michael Lorimer told selfmanagedsuper extending the NALI provisions to include situations where a fund might be seen as not charging or undercharging for related-party services could have horrific consequences.
“A small fund, for example, that might have a residential investment property where the trustees are effectively managing it and they replace a couple of lightbulbs and forget to get the fund to reimburse them, and technically they haven’t charged for something they should have on its face value, which would result in all of the rent that the fund is receiving to be taxed at the top marginal rate,” Lorimer said.
