What is NALI?
Non Arm’s Length Income (NALI) is income which is received by a fund in excess of what is reasonably expected to be received in a commercial and arm’s length transaction. Likewise an expense which is normally incurred in gaining or producing certain income is not paid can result in the income received being considered as NALI and taxed at 45%.
A common example is where a commercial property is owned by the SMSF and being rented to the trustees business and the rent being received by the fund is above market rent. In years gone by a strategy for some members to get more into super over and above their contribution caps was to pay a premium from their business where they would get a tax deduction higher than what the super fund would need to remit as tax on the net income in the fund. This would be advantageous from a tax point of view but also provided a way around the contribution caps. This practice would now see the premium be considered as NALI and the income would be taxed at 45%.
Is NALI restricted to Income?
The answer is no. It has now been recognized that if an expense which is normally incurred by a fund in the having a service provided by a business isnt being charged because the trustee is an employee of that business then the income associated with that expense would be also considered NALI and taxed at 45%.
An example of this is where a trustee is a real estate agent and manages their SMSF’s property through the business they work through but does not charge the super fund a management fee. In this case the rental income received by the fund would be considered NALI and taxed at 45%. If the fund has other income from dividends or interest, then this income will continue to be taxed at 15% as the expense that should have been paid by the fund was directly related to the rental income.
What happens if the expense doesn’t specifically relate to a certain asset class?
If the expense is a general fund expense and not directly related to a specific category of income, then this is where NALI turns plain UGLY! It is common practice for a partner in an accounting practice to have his super fund accounts prepared in house and not charge the fund for this service. As the accounting function relates to the compliance of the fund as a whole and not a specific asset class then this means that all the income and capital gains of the fund would be considered NALI and taxed at 45%.
This is in contrast to if the same partner prepared the accounts not using work assets ie at home, not using the software of the accounting practice and finally not lodging under the firms tax agent number then they would be considered as acting in their capacity as trustee and therefore no caught by NALI!
The ATO have released LCR 2019/D3 for comment which expands on the above in further detail. The comments made by the ATO recently is that there have been a number of submissions surrounding the dealing of this distinction between whether someone is acting in their capacity as a trustee or an individual. So at this point in time we should all be aware of the impact that this will potentially have on our funds but watch this space for further developments and the hope that the ATO take a sensible approach!
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