Major Dangers for SMSFs under Revamped NALI Provisions
The non-arm's length income (NALI) provisions, primarily outlined in S.295-550 of the ITAA 1997, are vital anti-avoidance measures aimed at preventing SMSFs from artificially inflating taxable income through non-arm's length transactions. Here's what you need to know:
Definition of Non-Arm's Length Transactions: Transactions are considered non-arm's length when parties involved aren't dealing on commercial terms. This applies even if they're not considered associates for taxation or related parties for SIS purposes.
Tax Treatment of NALI: Income deemed NALI in a complying SMSF is taxed at the highest marginal tax rate, which was 45% in the 2020 income year.
Historical Concerns and Legislative Response: The ATO raised concerns about technical deficiencies in the NALI provisions, particularly regarding whether they applied to SMSFs incurring non-arm's length expenditure (NALE). In response, the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 was introduced. This bill confirmed that NALI provisions can indeed apply to arrangements involving NALE incurred by SMSFs.
Amendment Application: The amendments made by the Bill apply to income derived in the 2019 income year and onwards, irrespective of when the relevant scheme was initiated.
Conclusion:
SMSFs must be cautious of the risks posed by non-arm's length transactions and non-arm's length expenditure, as they can result in income being classified as NALI and taxed at the highest marginal rate. Understanding and complying with the revamped NALI provisions are essential for SMSF trustees and advisors to avoid potential penalties and ensure tax efficiency.
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