The non-arm’s-length income (NALI) rules applying to SMSFs are set to be amended as Treasury has recognised it is unclear how they operate with regard to statutory income, an SMSF technical expert has said.
Speaking at SMSF Professionals Day 2019, co-hosted by selfmanagedsuper and SuperConcepts, in Adelaide today, SuperConcepts technical services and education general manager Peter Burgess said: “Statutory income is capital gains so they’re looking to amend the laws to make sure it is clear and to make sure the rules work the way they are intended to work.”
During his presentation, Burgess referred to the example used in the explanatory materials issued to date as to how NALI would be applied to capital gains generated within an SMSF.
The illustration uses a situation where an SMSF acquires a property for $500,000 instead of its market value of $900,000.
The property appreciates in value over three years, allowing the SMSF in question to sell the asset for $1 million.
“Under the current law you pay tax at the highest marginal rate on that $100,000 of that capital gain,” Burgess said.
“So in addition to having to pay NALI on any income the fund will receive from the property, because it acquired it at less than market rates, they are also going to have to pay NALI on the capital gain of $100,000.
“So they are amending the law to make it clear that’s the way NALI will apply in those situations.”
According to Burgess, the legislation affecting the changes to the NALI rules is likely to pass through parliament before the end of 2019 as it relates to integrity measures to ensure the law operates the way in which it was intended.