From 1 July 2018, the definition of non-arm’s length income (NALI) expanded to manage a loophole that allowed superannuation savings to be artificially inflated by non-arms length expenses that were provided free or at below market rates. For example, where services were provided to the fund by a company related to a fund member at reduced rates. In this way, funds could increase their superannuation savings while circumventing the contribution caps.
Where this situation arises, the rules tax this non-arms length income at the top marginal tax rate.
The question of whether the non-arm’s length income rules apply depends on the capacity in which the trustee undertakes those activities. Essentially, if you or a related entity are providing services to your superannuation fund in a capacity other than as trustee, and you (or the related entity) currently provide that service to the public, an arm’s length fee should be charged for this service. Failure to do so could result in non-arms length income applying to the applicable asset the expense relates to.
There has been a lot of confusion over the new rules and the ATO has stated that they will not commit compliance resources to this issue until 1 July 2020 where the expense is a general expense – ie not a specific investment expense. This gives trustees a limited opportunity to ensure that any non-arms length services provided are at market rates. If you are uncertain, please contact us and we can work with you to ensure your fund is not at risk.