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Non-arm's length income

Factors you need to consider when deciding whether a transaction is at arm's length.

Last updated 28 March 2021

About non-arm's length income

The factors that you need to consider when deciding whether a transaction is at arm's length or non-arm's length depend on whether the income is:

These factors are discussed in the following sections.

Complying SMSFs do not include non-arm's length income at A to T in section B. Instead they include it at:

For example, non-arm's length unfranked dividends are included at U1 Net non-arm's length private company dividends instead of at J Unfranked dividend amount.

However, don't include at labels U1, U2 or U3 the amount of non-arm's length income calculated using the 'Twice the difference approach' that arises from a non-arm's length general expense.

Non-complying SMSFs do not need to separate their non-arm's length income from their arm's-length income. They include both arm's-length and non-arm's length income at A to T.

Private company dividends that are non-arm's length income

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.

To decide whether the amount is consistent with an arm’s-length dealing, have regard to:

  • the value of the shares held by the SMSF in the company
  • the cost to the SMSF 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 at what rate)
  • whether the company has issued shares in lieu of dividends to the SMSF and the circumstances of the issue, and
  • any other relevant matters.

Consider any connection between the private company and the SMSF.

If the SMSF received non-arm's length private company dividends, include it at:

  • U1 Net non-arm's length private company dividends if the SMSF is complying
  • the appropriate question A to T (as if it were arm's length income) if the SMSF is non-complying.

For more information about determining whether income is non-arm's-length income, see:

  • Non-arm's length income
  • 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
  • Section 295-550 of the Income Tax Assessment Act 1997.

Trust distributions that are non-arm's-length income

A distribution from a trust is non-arm's-length income of a complying SMSF if:

  • the SMSF does not have a fixed entitlement to income from the trust (generally discretionary trusts) (see subsection 295-550(4) of the ITAA 1997), or
  • the SMSF has a fixed entitlement to income from the trust (generally unit trusts), which is derived under a scheme where the parties were not dealing with each other at arm's length and either or both of the following applies: (see subsection 295-550(5) of the ITAA 1997).      
    • the income is greater than might have been expected had the parties been dealing with each other at arm’s length in relation to the scheme
    • from 1 July 2018, the loss, outgoing or expenditure (either revenue or capital in nature) incurred in acquiring the entitlement, or in gaining or producing that income, are less than (including a nil amount) those which might have been expected had the parties been dealing with each other at arm's length in relation to the scheme.

If the SMSF received non-arm's-length trust distributions, include it at:

  • U2 Net non-arm's-length trust distributions if the SMSF is complying
  • M Gross trust distributions (as if it were arm's-length income) if the SMSF is non-complying.

For more information, see:

Legislation

Section 295-550 of the Income Tax Assessment Act 1997.

Identifying other types of income that are non-arm's length

Other types of income (that is, income that is not a private company dividend or distribution from a trust) are non-arm's length income if the income is derived under a scheme where the parties were not dealing with each other at arm's length and either or both of the following applies:

  • the income is greater than might have been expected had the parties been dealing with each other at arm’s length in relation to the scheme
  • from 1 July 2018, the loss, outgoing or expenditure (either revenue or capital in nature) incurred in gaining or producing the income are less than (including a nil amount) those which 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 income depends on all of the circumstances of the relationship including the return on the investment and the commercial risks undertaken by the SMSF. Other non-arm's length income may include, for example:

  • interest on loans
  • rent from property
  • profit on the sale of assets
  • net capital gains.

If the SMSF received non-arm's length income that is not a private company dividend or a trust distribution, include it at:

  • U3 Net other non-arm's length income if the SMSF is complying
  • the appropriate question A to T (as if it were arm's length income) if the SMSF is non-complying.

    Note: Don't include at labels U1, U2, U3, U or any other label in Section B non-arm’s length income as a result of non-arm’s length general expenses. These general expenses result in non-arm’s length income calculated using the ‘Twice the difference approach' and will be taken into account when calculating the ‘Tax on taxable income’ at label T1 in Section D.
  • Note: These instructions have been updated to reflect retrospective law changes for non-arm’s length expenses for superannuation entities. The changes apply from 1 July 2018 and are contained in Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.

For more information, see:

Legislation

Section 295-550 of the Income Tax Assessment Act 1997

Tax treatment of cryptocurrencies

  • If you acquired cryptocurrency as an investment or disposed of it in 2018–19, you may have to pay capital gains tax on the disposal. For more information, see Tax treatment of cryptocurrencies.
  • If you acquired or disposed of cryptocurrency in the ordinary course of your business in 2018–19, the funds or property you receive through the acquisition and disposal are likely to be ordinary assessable income. For more information, see Tax treatment of cryptocurrencies.

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