SMSF practitioners have been reminded the application of the non-arm’s-length expenditure (NALE) rules will not be limited to the two-times factor, but will reference a fund’s total income and any relevant deductions when calculating the tax penalty that will be applied.
Knowledge Shop superannuation adviser Natalie Scott said the rules, which came into effect on 1 July, can be dampened by the size of the fund’s taxable income.
“With the new rules we need to work out the difference between the amount that was expected to be charged at an arm’s-length rate and what’s actually occurred [at non-arm’s length] and then compare that with the income of the fund,” Scott said during an online briefing today.
“We don’t just look at the taxable income, we need to add back any assessable contributions and add back any deductions against that.
“NALE is then part of what we call the non-arm’s-length component (NALC) of the SMSF’s taxable income, which is taxed at the highest marginal rate.
“However, the SMSF’s total NALC cannot exceed its assessable income minus deductions and that excludes any assessable contributions and deductions against those assessable contributions.
“What the new rules are essentially saying is if we work out what the difference should have been, times that by two, and it is more than the taxable income of the SMSF, then we only apply it to the taxable income of the SMSF, we don’t need to do the two-times factor approach.”
She gave an example of an SMSF with a trustee who worked in a legal practice and carried out legal services worth $17,000 for the fund, but only charged $12,000, meaning NALE would apply to the $5000 difference.
In the same year, the fund received rental income of $34,000 but had property deductions of $15,000 and also received assessable contributions of $10,000 with related deductions of $1000, resulting in taxable income of $16,000.
“Under the two-times factor approach we take the difference between $17,000 which should have been charged and the $12,000 charged, times that by two and we get to $10,000,” Scott said.
“We then need to work out the NALC and the cap on that is $16,000, which is the taxable income minus the concessional contributions of $10,000 plus the deduction against those of $1000, and we get $7000 in NALC and because that is less than the two-times factor approach, we apply NALE to the $7000.
“The remaining $9000 is taxed concessionally at 15 per cent.”
