The non arm’s length income rules, which have been the subject of tortuous debate and consideration for several years, have finally been passed. They are effective from 1 July 2024 but apply from 1 July 2018.
They limit the amount of NALI arising from a non-arm’s length transaction to twice the difference between the actual expense and the expected market rate of the expense.
Large APRA funds are excluded.
Simply put, if a related party accountant charged their SMSF accounting fees of $1,000, when they should have charged $2,000, then the amount of NALI would be 2 x ($2,000 – $1,000) = $2,000. Tax of 45% would then be levied = $900.
But just how significant will the application of NALI be? Clearly, where no charge has been raised, there is an issue but, if one has, who is to say what constitutes market value. It is problematic as to whether it will be reported as the ATO is not going to investigate situations where:
- a reasonable attempt has been made to apply an arm’s length amount or
- a broad staff discount has been applied or
- the trustee has provided the service in their capacity as trustee only.
Importantly, this is not a SIS compliance area so is not something the auditors are required to check.
The far more serious application of NALI is the permanent tainting of an asset, generally real estate, where the net income and eventual taxable capital gain is hit with 45% tax. Incredibly this provision was not even considered.
