The ATO has released a draft taxation determination (TD) detailing how the non-arm’s-length income (NALI) rules apply to the statutory income generated by an asset in an SMSF that has not been acquired on a commercial basis.
Draft TD 2023/D1, released yesterday by the ATO, references section 295.550 of the Income Tax Assessment Act (ITAA) to identify what is NALI and non-arm’s-length expenditure (NALE), using both of these definitions to determine the statutory amount impacted by NALI.
In Appendix 1 of the determination, the regulator stated: “An amount of statutory income for the purposes of subsection 295-550(1) can include a part of the net capital gain calculated in accordance with the method statement in [ITAA] subsection 102-5(1) [which defines net capital gains].
“That is, where a capital gain arises as a result of a non-arm’s-length dealing, the NALI is determined by reference to the amount of the non-arm’s-length capital gain, being the capital proceeds less the cost base arising from the scheme in which the parties were not dealing at arm’s length.
“This non-arm’s-length capital gain is subject to the relevant CGT market value substitution rules (if any) and is then reduced by any attributable deductions to calculate the non-arm’s-length component.”
The TD noted the application of section 295-550(1)(a) of the ITAA meant the ordinary or statutory income would be NALI if the amount of income derived by the fund was more under the scheme than the amount it was expected to derive if the parties had been dealing with each other at arm’s length.
Referencing section 295-550(1)(b) and (c) of the act, it applied the same methodology to losses or expenditure, noting if they were non-existent or less than what the fund was expected to incur from arm’s-length dealings, these amounts would be considered NALE.
“Where there is a sufficient nexus between an amount of NALE and ordinary or statutory income of a superannuation fund, that income will be NALI under paragraphs 295-550(1)(b) or (c) and will form part of the superannuation fund’s non-arm’s-length component that is taxed at the highest marginal rate,” it stated.
“In circumstances when the superannuation fund incurs NALE to acquire a specific asset, there is a sufficient nexus between the NALE and any capital gain that arises from a CGT event in relation to the asset for paragraphs 295-550(1)(b) or (c) to apply such that the capital gain is NALI.”
It added the amount of statutory income that is NALI could not exceed the superannuation fund’s net capital gain and where the non-arm’s-length capital gain made by the super fund exceeded the fund’s net capital gain, the amount of NALI would equal the fund’s net capital gain.
The draft determination is open to comments until 28 July.