Heavy price paid for dividends treated as non-arm’s length income
The purpose of the non-arm’s length income (‘NALI’) provisions is to ensure the non-arm’s length component of a superannuation fund’s income (less any deductions attributable to that income) is taxed at the top marginal tax rate (currently 45%). Refer to S.295-550 and S.295-545(2) of the ITAA 1997 and S.26(1)(b) of the Income Tax Rates Act 1986.
Broadly, the NALI provisions exist to remove any tax benefit that may be achieved by directing income into an SMSF in a non-arm’s length manner to take advantage of the concessional tax rates. That is, where income of the fund is determined to be NALI, the 45% tax rate will apply to the income, rather than the 15% rate that ordinarily applies. Furthermore, SMSFs cannot apply the pension earnings exemption to NALI (i.e., regardless of whether the underlying asset is funding a retirement phase pension). Refer to S.295-385(2) and S.295-390(2) of the ITAA 1997.
Pursuant to S.295-550(1), an amount of ordinary income or statutory income will be considered NALI of an SMSF if it is more than the fund might have been expected to derive had the parties to the arrangement under which the income was derived been dealing at arm’s length. For example, NALI would arise where an SMSF leases premises to a related party for an inflated rental amount.