Recent amendments to section 295-550 of the Income Tax Assessment Act 1997 have provided clarity on how non-arm’s length expenditure (NALE) affects self-managed superannuation funds (SMSFs) and small APRA-regulated funds.
These amendments are part of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.
In response, we have reviewed our guidance materials and are seeking your feedback on the proposed changes. Both documents are now available for public consultation until 24 January 2025.
Our proposed draft changes to LCR 2021/2DC explain the 2024 legislative amendments to the non-arm’s length income (NALI) provisions and remove our compliance approach in respect of non-arm’s length general fund expenses given the updated law.
We note there is significant media coverage about how the non-arm's length expenditure rules in the NALI provisions apply.
Here's what you need to know:
- Where a fund trustee fails to deal at arm’s length in respect of a particular asset and fails to pay an arm’s length price for anything related to that asset, all income in respect of that asset (which may include any capital gain on its disposal) will be NALI. This income will be subject to the highest marginal rates of tax.
- There is an easy way for fund trustees to avoid the tax consequences of the non-arm’s length expenditure rules. That is to deal at arm’s length and pay an arm’s length price for assets, products, and services.
- When a person provides services to a fund in their capacity as trustee of the fund, the NALI provisions do not apply, even if no amount is charged to the fund.
- However, if the person provides services in some other capacity (such as through their own business), they must ensure the dealings are at arm’s length and an arm’s length price is paid by the fund. This also applies where a third party is engaged to provide services for the fund.
- The LCR clarifies the arm's length price paid by the trustee could be a discounted price and still be on arm's length terms where they are consistent with normal commercial practices. Like when a trustee individual is entitled to a discount under a discount policy where the same discount is provided to other individuals such as employees or shareholders.
- Fund trustees should keep records of all dealings to demonstrate the arm’s length nature of the dealing (including the price paid).
Additionally, draft TR 2010/1DC2 has been amended in light of the changes to NALI. We have also removed our proposed compliance approach in respect of contributions arising from value shifting arrangements.
The compliance approach in Appendix 2 of the draft Ruling has been removed as it didn't apply in many circumstances. In the limited circumstances when it did apply (where there was value shifting), it provided an unfair advantage by allowing these trustees dealing on a non-arm's length basis to bypass the contribution cap rules.
For more detailed guidance, refer to LCR 2021/2DC and TR 2010/1DC2 on our website.
If you're unsure if your SMSF is impacted by these changes you should speak to your tax or super professional.
You can find out more about non-arm's length income on our website.
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