If you have a self-managed super fund (SMSF), it’s important to be aware of recent changes to how non-arms’ length income (NALI) is treated from a tax perspective.
Instead of being eligible for the concessional superannuation tax rate of 15%, NALI income is taxed at the highest marginal rate of 45% if it results in the SMSF being better off. This applies even to SMSF members who are in the pension phase. NALI income cannot be claimed as exempt current pension income.
Test to determine SMSF NALI
The Australian Taxation Office applies three tests to determine in SMSF income is NALI income:
1) if the income is more than would be expected if the parties involved were dealing at arm’s length.
2) if the fund has incurred a loss, expense, or other outgoing that is less than it would have been if the parties involved were dealing at arm’s length.
3) if the fund does not incur a loss, expense, or other outgoing that it would have incurred if the parties involved were dealing at arm’s length.
In all these instances, the SMSF’s income would be taxed at 45% less any allowable deductions.
However, it’s important to note that NALI does not apply to services provided to the fund by an SMSF trustee (or a director if the fund has a corporate trustee) in their capacity as a trustee or director. For example, if one of the SMSF members is a chartered accountant and registered tax agent and wants to prepare the fund’s annual returns for free, they may do so as long as they do not actually engage their accounting firm. If the firm’s equipment and assets are not used to prepare the annual returns, this saving will not be regarded as NALI.
Examples of SMSF NALI
Here are some examples of SMSF NALI.
- An SMSF receiving less than market rental income rate from a commercial property leased to one of its members (or one of their relatives).
- An SMSF buys a commercial property from one of its members (or one of their relatives for less than market value). In this case, the capital gain on the sale is classed as NALI.
- An SMSF enters into a limited recourse borrowing arrangement (LRBA) at an interest rate that’s lower than commercial rates.
How we can help
If you have a self-managed super fund and you are concerned about potential NALI transactions, our specialist SMSF advisors at Wilson Pateras in Richmond can help.
We can also help you with any other SMSF queries you may have. We are a full-service accounting firm supporting individuals and businesses to achieve their financial goals.
Our other services include:
- individual financial planning.
- personal insurance.
- retirement planning.
- tax planning.
- personal lending and finance.
- business accounting and tax.
- business bookkeeping.
- arranging business lending and finance.
Contact us today to find out more. We will take the time to understand your individual or business needs. We pride ourselves on providing accessible, professional, and trustworthy advice to our clients.