The Australian Taxation Office (ATO) recently released draft law companion ruling (LCR) 2019/D3 on non-arm’s length income. It clarifies further that, in certain cases, financial services professionals providing services to their own SMSFs can cause the entirety of the fund’s income to attract the top marginal rate of tax.
Originally, NALI was called “special income” as it was essentially income derived where parties were not dealing with each other at arm’s length, where the amount received was more than what they would otherwise have received if dealing at arm’s length. Parties do not have to be related to be dealing with each other in a non-arm’s length manner. The rules were to prevent income being diverted into the low tax environment of superannuation. With the lowering of the contribution standards, it has increased the risk of people attempting to divert income.
To circumvent the NALI rules, some Trustees used nil interest LRBAs. As NALI talked only of receiving “more” income than would otherwise there was no NALI issue with less expenditure. Thus, wealthy individuals loaned their SMSFs money to purchase property at nil interest. This has now been stopped with the LRBA safe harbour provisions. However, it did identify a gap in NALI and the need for NALE.
To close that gap in 2018, the government introduced a bill removing some ambiguity or expanding NALI. This bill lapsed due to the election. It was reintroduced as Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019 and is now law. The amendments apply in relation to income derived in the 2018–19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018. For example, if a property was sold to the fund for less than market value 10 years ago, NALI still applies under this amendment
The Bill clarifies the operation of Subdivision 295-H to ensure that complying superannuation entities cannot circumvent the non‑arm’s length income rules by entering into schemes involving non‑arm’s length expenditure (including where expenses are not incurred).
The framework for the new non-arm’s length income rules remains broadly the same:
- there must be a scheme; and
- the parties to the scheme must incur less (or nil) expenditure than would otherwise be expected if the parties were dealing with each other on an arm’s length basis in relation to the scheme.
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