Understanding Non-Arm's Length Income (NALI) in Superannuation Funds
Background: According to Section 295-545, the taxable income of complying superannuation funds, including Self-Managed Superannuation Funds (SMSFs), is divided into two components:
1. Non-Arm's Length Component:
This comprises the superannuation fund's non-arm's length income for the income year, minus any deductions attributed to that income. The non-arm's length component is taxed at the highest marginal tax rate, which was 45% in the 2020 income year.
2. Low Tax Component:
The remaining portion of the fund's taxable income for the income year, calculated by subtracting the non-arm's length component from the total taxable income, constitutes the low tax component. The rate of tax payable on this component is 15%.
Tax Warning:
It's important to note that the pension earnings exemption doesn't apply to Non-Arm's Length Income (NALI) in SMSFs. As per Sections 295-385(2)(a) and 295-390(2)(a), SMSFs cannot benefit from the pension earnings exemption for NALI. Therefore, regardless of whether the underlying asset is funding a retirement phase pension, NALI in an SMSF is subject to the highest marginal tax rate.
Seek Expert Advice:
For any queries or assistance regarding NALI and its taxation implications for superannuation funds, feel free to contact Tax Ideas Accountants & Advisers at +61 2 83181545, or book an appointment through our live calendar.
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