SMSF trustees and members should be cautious of investments where they use their fund to take equity in a business in which they are employed with the expectation of profiting from future growth as this might be regarded as non-arm’s-length income (NALI), DBA Lawyers principal Dan Butler has stated.
Butler said under the NALI provisions any dividend from such a company or distribution from a unit trust that is greater than arm’s length could breach those provisions.
Speaking at The Tax Institute National Superannuation Conference in Sydney recently, he said while there was an awareness of the danger of property developments linked to SMSFs, there were also dangers for SMSF trustees and members becoming equity holders in businesses and start-ups where the trustee/member contributes extra ‘sweat’ (or work) for a return on equity (shares/units) owned by their SMSF.
“This is what the ATO is concerned with, particularly in the venture capital space, with those emerging businesses that don’t have cash flow, and say: ‘Come on board, we’ll give you equity. You do the work, we won’t pay you the world, but you’ll do well if our business goes well,’” he added.
“However, Taxpayer Alert 2016/6 is about diverting personal services income to an SMSF by having your super fund take equity in the business, so we know that’s becoming an issue.
“At times we’re seeing PCG (Practical Compliance Guideline) 2021/4 applied, which is about the allocation of professional profits being aligned with the business and NALI on the super fund where equity has gone into the business.
“The ATO yesterday talked about Taxpayer Alert 2023/2 where, in effect, the super fund invested in a company that invested in another company and that company did some non-arm’s-length dealings, and the SMSF argued that at the fund level it was not NALI.
“So watch out for those transactions because the ATO is on to them as well.”
