Please note that recent changes to tax regulations regarding superfund expenses may impact your client’s SMSFs. The new rules took effect on 29 June 2024 but are retroactive to 1 July 2018.
The new regulations address ‘non-arm’s length general expenses’ (NALE). These are services provided to an SMSF at below-market rates or for free. Income derived from these expenses will be classified as ‘non-arm’s length income’ (NALI) and taxed at the top marginal rate of 45%.
Under Australian tax law, all SMSF transactions must be conducted at ‘arm’s length.’ This means that all parties involved must engage on a commercial, unrelated-party basis, and any related services must be compensated at market rates.
Here’s an example scenario: Paul is a financial adviser, and to save some money, he does some work for his own SMSF for free. Normally, he would charge a client $5,000 for the same work. Therefore, the services are not being provided at arm’s length and the income gained from the fund can be taxed at the top marginal rate of 45%.
Here are some important points to know:
Expense type makes a difference
A distinction is made between expenses that do not relate to any particular asset of the fund (general expenses) and expenses that relate to a particular asset (specific expenses). General expenses can include accounting fees, actuarial costs, administrative or trustee fees, or investment advice that does not relate to a specific investment (e.g. asset allocation advice).
- For specific expense: NALI will be all income in relation to the particular asset
- For general expense: NALI will be calculated as twice the difference between the amount of the actual expense and the expected market value of the expense.
Trustee roles
If you are a trustee, under the superannuation law, you can’t generally charge for your duties. However, if you provide professional services (such as accounting, auditing or financial advising) at a free or reduced rate, the NALI rules may apply.
Limits and caps
The non-arm’s length component is the lesser of:
- The sum of the following:
- For specific expenses: NALI less relevant deductions, and
- For general expenses: 2 x [amount of expense entity expected to have incurred less amount actually incurred]
OR
- SMSF’s taxable income (minus assessable contributions plus deductions attributable to concessional contributions)
If you are unsure about how these new regulations affect your clients’ SMSF, please get in touch.