Distribution from Trusts Non-arm’s length income (NALI)
The Australian Taxation Office is reviewing SMSFs that have received trust distributions.They are looking at complex arrangements between related entities in a private group that result in large capital gains or inflated income being distributed to SMSFs. This is often achieved through a chain or multiple trusts.
Non-arm’s length income is taxed at the top marginal rate rather than the 15% concessional rate applicable to superannuation funds.
An SMSF must transact on an arm's length basis. The purchase and sale price of fund assets should always reflect the true market value for the asset. The income from assets held by the Fund should always reflect the true market rate of return. (Refer SISA Sec 109)
Broadly, a complying SMSF will have non-arm’s length income if the income is:
- derived from a scheme in which the parties were not dealing with each other at arm's length, and
- more than the SMSF might have been expected to derive if the parties had been dealing with each other at arm's length. This could be regarded as “mates’ rates” income.
Income derived by an SMSF as a beneficiary of a discretionary trust is also non-arm's length income, as are dividends paid to an SMSF by a private company (unless the dividend is consistent with arm's length dealing).
In addition, income from investments that have non-commercial conditions – for example, limited recourse borrowing arrangements with zero interest loans – may also be considered non-arm's length income.
Voluntary disclosure
Non-arm’s length income receipts can be voluntarily disclosed to the ATO in accordance with the Early Engagement and Voluntary Disclosure Service as discussed above.
Please discuss this with Baumgartner Super on 1300 04 7673 or info@baumgartnersuper.com.au if you require further information.
Disclaimer:
Please note that this article includes general advice only and is not specific financial product advice. Baumgartner Super and the Baumgartner Group will not be held liable for the consequences of any action taken or otherwise in relation to this article.
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Distribution from Trusts Non-arm’s length income (NALI)
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