Did the SMSF receive non-arm's length income?
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No |
Leave U1, U2, U3 and U blank. Go to W. |
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Yes |
Read on. |
Was the SMSF a complying SMSF for 2020–21?
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No |
Leave U1, U2, U3 and U blank. Write the non-complying SMSF's non-arm's length income where appropriate at A to T above. Then go to W. |
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Yes |
Read on. |
Write the SMSF's non-arm's length income at:
- U1 Net non-arm's length private company dividends
- U2 Net non-arm's length trust distributions
- U3 Net other non-arm's length income
Consider whether any income that the SMSF earned in 2020–21 was earned through a transaction that was not at arm's length.
For more information about identifying the SMSF's non-arm's length income, see Non-arm's length income.
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.
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 expenses that have a sufficient nexus to all ordinary or statutory income of the fund (general expense) rather than a particular asset or assets of the fund. 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.
Non-arm's length income is not exempt from income tax under the exempt current pension income rules.
Net non-arm's length income
Each amount 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 income and as much of other deductions that appropriately relate to that income. The amounts deducted against the SMSF’s non-arm’s length income at labels U1, U2 or U3 should not be included in Section C, except, where non-arm’s length general expenses that are actually incurred, these are included as a deduction at the appropriate label in Section C - Deductions and non-deductible expenses, to the extent that they are deductible.
Non-arm's length losses
If the net amount of non-arm's length income is a loss, do not show the loss at U. The loss may be offset against future non-arm's length income. Keep a record of the loss amount with the SMSF's tax records.
U1 Net non-arm’s length private company dividends
Was the SMSF paid non-arm’s length private company dividends?
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No |
Leave U1 blank. Go to U2. |
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Yes |
Read on. |
Write at U1 the total of:
- non-arm’s length private company dividends which were paid to the complying SMSF in 2020–21, and
- franking credits attached to the non-arm's length private company dividends if the SMSF is entitled to a corresponding franking credits tax offset (see Entitlement to franking credits tax offset)
less
- deductible expenses related to earning the non-arm's length private company dividends.
If you are unsure whether some or all of the SMSF's income is non-arm's length, see Non-arm's length income.
Include non-share dividends that are non-arm's length income at U1.
Do not include private company dividends that are arm's length income (include these at A to T as appropriate). In addition to including a franking credit at U1, you must also include it at either:
- E1 Complying fund’s franking credits tax offset in section D if the SMSF is a complying fund
- C2 Rebates and tax offsets in section D if the SMSF is a non-complying fund.
Non-arm's length private company dividends are not exempt from income tax under the exempt current pension income rules.
U2 Net non-arm's length trust distributions
Did the SMSF receive a share of net income from a trust that is non-arm's length?
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No |
Leave U2 blank. Go to U3. |
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Yes |
Read on. |
Write at U2 the total of:
- any non-arm's length income which the complying SMSF received in 2020–21 as a share of net income from a trust
less
- deductible expenses related to earning the amount at U2.
If you are unsure whether a share of net income from a trust is non-arm's length, see Non-arm's length income.
Include the following types of income at U2 if the income is non-arm's length income and received as a share of net income from a trust:
- net capital gains
- dividends (or non-share dividends), along with any attached franking credits if the SMSF is entitled to a corresponding tax offset (see Entitlement to franking credits tax offset)
In addition to including a franking credit at U2, you must also include it at either:
- E1 Complying fund’s franking credits tax offset in section D if the SMSF is a complying fund
- C2 Rebates and tax offsets in section D if the SMSF is a non-complying fund.
Do not include a share of net income from a trust that is arm's length income (include this at M Gross trust distributions).
A share of net income from a trust that is non-arm's length is not exempt from income tax under the exempt current pension income rules.
U3 Net other non-arm's length income
Does the SMSF have any other non-arm’s length income?
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No |
Leave U3 blank. Go to U. |
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Yes |
Read on. |
Write at U3 any non-arm's length income which the complying SMSF has for 2020–21 and that was not included at U1 or U2. If you are unsure whether the income is non-arm's length, see Non-arm's length income.
Do not include at label U3:
- non-arm's length income that is more appropriately included at U1 Net non-arm's length private company dividends or U2 Net non-arm's length trust distributions
- non-arm’s length income as a result of a general expense calculated using the 'Twice the difference approach' (being the multiple of 2 of the difference between the amount that might have been expected to be incurred if the parties had been dealing at arm’s length and the amount actually incurred) – this income will be taken into account when calculating the ‘Tax on taxable income’ at label T1 in Section D
- income that is arm's length income (write it at A to T as appropriate).
Non-arm's length income is not exempt from income tax under the exempt current pension income rules.
U Net non-arm's length income
Add the amounts you wrote at U1, U2 and U3.
Note: Due to retrospective law changes for non-arm’s length general expenses, label U may not align with the descriptor on the return form being ‘subject to 45% tax rate’.
Non-arm's length income is not exempt from income tax under the exempt current pension income rules.
Continue to: W Gross income