A senior superannuation stakeholder has indicated transactions giving rise to non-arm’s-length income (NALI) and non-arm’s-length expenditure (NALE) are currently only being identified by the fund’s auditor.
“A number of auditors have actually said to me that they are finding [instances of] NALI … but it’s not being identified by the trustee, by their accountant, their administrators or by other people involved in the management of the superannuation fund,” Chartered Accountants Australia and New Zealand superannuation and financial services leader Tony Negline told delegates of the SMSF Association Audit Day 2025 held recently.
Negline pointed out the seriousness of this situation from a wider SMSF administration perspective.
“What that effectively means is that the tax liability of the fund has not been calculated correctly and that is obviously then going to flow through to the member balances in one form or fashion, so it might actually have a material impact on member benefits, it might have a material impact on the net income of the fund [and the like],” he explained.
According to Negline, another concern over the misidentification of NALI and NALE is the possibility additional compliance issue are also not being detected.
“[A transaction involving] non-arm’s-length income often does not happen as an island. [It can] but it may actually involve other compliances breaches,” he noted.
To this end, he acknowledged some of the common compliance issues that can be present when an SMSF has triggered the NALI and NALE provisions.
“[Here is] a very quick list of some of the common breaches that may occur in relation to non-arm’s-length income. It might be a section 34 breach, all of these references are to the SIS (Superannuation Industry (Supervision)) Act, which, of course, [involves] the operating standards,” he said.
“It might be a section 62 breach, which, of course, [pertains to] the sole purpose test. It might be [a section 65 breach], which [involves] lending to members or relatives or related parties. It could be a [section] 66 breach, which, of course, [is about] acquiring assets from members or their relatives.
“So there are a vast number of breaches that might actually involve non-arm’s-length income. All of those obviously need to be considered in their own way and many of those breaches are reportable on the auditor contravention report.”
