U Net non-arm’s length income

Show at U the net amount of ordinary income and statutory income that a complying superannuation fund, ADF or PST derives that is non-arm's length income. Income shown at U is taxed at 45%.

This can include, for example:

• private company dividends (including non-share dividends)
• a share of net income from trusts
• a net capital gain to the extent it reflects a non-arm’s length capital gain
• other non-arm’s length income that is greater than might have been expected had it been derived from an arm’s length dealing.

Each component of non-arm’s length income is reduced by any deductions attributable, either in whole or in part, to that income. Deductions against that income are those that relate exclusively to the non-arm’s length component of income, and as much of other deductions that appropriately relate to that income.

If the net amount of non-arm's length income is a loss, do not show the loss at U. Quarantine the loss for future offset against future non-arm's length income. Keep a record of the quarantined loss amount with the fund’s tax records.

Non-arm’s length trust distributions

A share of net income from a trust is non-arm's length income of a complying superannuation fund, complying ADF or PST if:

• the fund or PST does not have a fixed entitlement to income from the trust (generally discretionary trusts), see subsection 295-550(4) of the ITAA 1997, or
• all of the following apply    
  • the fund or PST has a fixed entitlement to income from the trust,
  • the fund or PST acquired the entitlement under an arrangement where the parties were not dealing with each other at arm's length, and
  • the fund’s or PST’s share of the net income is more than it would have been had the parties been dealing with each other at arm’s length; see subsection 295-550(5) of the ITAA 1997.
   

If the fund's share of net income includes franked dividends (or franked non-share dividends), gross up the fund's share of net income by including the attached franking credits that the fund is entitled to and reduce this amount by any related deductions. Include the grossed up amount in the amount shown at U.

To claim a franking credit tax offset for these franking credits, a complying superannuation fund, ADF or PST includes the amount of franking credits at E1 Complying fund's franking credits tax offset item 12 and a non-complying superannuation fund or ADF includes the amount of franking credits at C2 Rebates and tax offsets item 12.

If a share of net income includes a capital gain, calculate the capital gain as per the instructions at A Net capital gain. To the extent the net capital gain reflects any non-arm’s length capital gain it should be shown at U.

Non-arm’s length private company dividends

A dividend paid by a private company, or ordinary income or statutory income reasonably attributable to such a dividend, is non-arm's length income 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 circumstances. 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
• whether the company has issued shares in lieu of dividends to the fund, and the circumstances of the issue.

If private company dividends (including non-share dividends) are non-arm’s length income of the fund, gross up the amount of private company dividends (including non-share dividends) to include any attached franking credits and reduce this amount by any related deductions and show the result at U.

For a complying superannuation fund, complying ADF or PST, include the amount of franking credits attached to such dividends at E1 Complying fund's franking credits tax offset item 12. For a non-complying superannuation fund or a non-complying ADF, include the amount of franking credits attached to such dividends at C2 Rebates and tax offsets item 12.

If private company dividends (including non-share dividends) are 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 or if applicable D Net foreign income and D1 Gross foreign income and E Australian franking credits from a New Zealand company.

Other types of income

Income is non-arm’s length income if the parties to a scheme are not dealing with each other at arm’s length and the income derived from the scheme is greater than might have been expected had the parties been dealing with each other at arm’s length in relation to the scheme. Whether income is non-arm’s length depends on all of the circumstances of the relationship including the return on the investment and the commercial risks undertaken by the fund.