Show at U the net amount of income that a superannuation fund, ADF or PST has received from a transaction or series of transactions between parties that is non-arm's length income.
This includes income such as:
- private company dividends (including non-share dividends)
- certain distributions from trusts, and
- other excessive non-arm's length income that is greater than might have been expected had it been derived from an arm's length dealing.
Income is non-arm's length income if the parties to a transaction or a series of transactions are not dealing at arm's length and the income derived from the transaction is greater than might have been expected had the parties been dealing at arm's length in relation to the transaction. The transactions covered may include interest on loans, rent from property, profit on sale of assets and capital gains, and franking credits on dividends.
The test for such income is a question of fact, and all of the circumstances in a relationship are relevant in determining whether the amount of income derived from a non-arm's length dealing is greater than might have been expected had the parties been dealing at arm's length, including the commercial risks undertaken by the fund.
Each component of non-arm's length income is reduced by any deductions attributable to that income and is then taxed at the highest marginal tax rate (currently 45%). Allowable deductions against that income are those that relate exclusively to the non-arm's length component of income, and as much of other allowable deductions that appropriately relates to that income.
If this amount is a loss, quarantine the loss for a future offset against income of the same class. Do not show a loss at U, but keep a record of the quarantined loss amount with the fund's tax records.
Non-arm's length trust distributions
Trust distributions are non-arm's length income of a complying superannuation fund, complying ADF or PST if they are:
- distributions where the fund does not have a fixed entitlement to income from the trust (generally discretionary trusts), and
- distributions where the fund has a fixed entitlement to income from the trust and the fund acquired the entitlement to the distribution under an arrangement where the parties were not dealing at arms length and the amount of income is more than the amount that would have been provided had the parties been dealing at arm's length.
If a fund receives a distribution from a trust, examine the circumstances of the distribution to determine if the income is 'non-arm's length income', as defined in sections 295-550 of the ITAA 1997. If the amount is determined to be 'non-arm's length income', include at U.
If a distribution includes franked dividends (including franked non-share dividends), gross up the distribution to include any attached franking credit. Include the grossed up amount in the amount you show at U.
If the fund is a complying superannuation fund, complying ADF or PST, include the amount of franking credit attached to such dividends at F4 Credit: Refundable franking credits item 12. If your fund is a non-complying superannuation fund or a non-complying ADF, include the amount of franking credit attached to such dividends at C2 Credit: Rebates and tax offsets item 12.
Non-arm's length private company dividends
An amount of ordinary income or statutory income is non-arm's length income if it is a dividend paid by a private company, or is reasonably attributable to such a dividend, unless the amount is consistent with an arm's length dealing.
In deciding whether the amount is consistent with an arm's length dealing consideration must be given to any connection between the private company and the fund, as well as any other relevant circumstance. Other relevant circumstances include:
- the value of the shares held by the fund in the company
- the cost to the fund of the shares on which the dividends were paid
- the dividend rate on those shares
- whether dividends have been paid on other shares in the company, and the dividend rate, and
- whether the company has issued shares in lieu of dividends to the fund, and the circumstances of the issue.
For more information on determining when an amount is non-arm's length income, refer to Taxation Ruling TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income.
Gross up the amount of private company dividends (including non-share dividends) to include any attached franking credit, reduce this amount by any related deductions and show the result at U.
If your fund is a complying superannuation fund, complying ADF or PST, include the amount of franking credits attached to such dividends at F4 Credit: Refundable franking credits item 12. If your fund is a non-complying superannuation fund or a non-complying ADF, include the amount of franking credit attached to such dividends at C2 Credit: Rebates and tax offsets item 12.
Do not show at U any dividends received directly or indirectly from a New Zealand company.
Where private company dividends (including non-share dividends) are considered to be consistent with an arm's length dealing, such that the amount should not be treated as non-arm's length income, the dividends received are taxed at 15%. Show these dividends at either J Unfranked dividend amount, or K Franked dividend amount and L Dividend franking credit.
All income shown at U is taxed at 45%.