The recent legislation implementing the non-arm’s-length expenditure (NALE) rules has also introduced a new cap that will prevent any penalties exceeding the level of taxable income for a member of an SMSF.
SMSF Association chief executive Peter Burgess flagged the new cap, called the non-arm’s-length component (NALC), during his presentation at the body’s recent Technical Summit 2024 in Sydney, noting it was introduced as the two-times shortfall method used to calculate NALE had no connection to actual taxable income.
“We could have a situation where the NALE component exceeds the amount of the fund’s actual taxable income, so the government are introducing a new cap so NALE cannot exceed the fund’s taxable income, excluding accessible contributions and deductions,” Burgess said.
“You might recall the stories being splashed across the pages of the papers a few years ago when the Australian Prudential Regulation Authority (APRA)-regulated funds were advocating for change to these rules, and the stories were that millions of people’s superannuation guarantee (SG) contributions could be taxed at 45 per cent.
“That was a reference to the fact that the way the rules were working back then was if a large fund incurred NALE, it could result in all the income of that fund, including SG contributions, being taxed at 45 per cent.
“To ensure we don’t have a situation like that, where SG contributions received by SMSFs or a small APRA fund are taxed at 45 per cent, they have introduced this cap so it means assessable contributions, minus related deductions, will always be part of the low tax component.”
He highlighted an example provided in the explanatory materials to the NALE legislation in which a lawyer provides legal services to their SMSF worth $8000 at no cost and in the same income year makes deductible contributions to the fund of $12,000, with the fund’s taxable income of $22,000 comprising $35,000 of rental income minus $25,000 in deductions plus $12,000 in deductible contributions.
“The NALE amount is $16,000, which is two times the shortfall under the new law, however, the NALC cannot exceed the fund’s taxable income excluding assessable contributions and deductions against accessible contributions,” he said.
“As the fund’s taxable income is $22,000 and the accessible contributions are $12,000 with no related deductions, the amount of the NALC is capped at $10,000.”
