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SMSF Non-Arm’s Length Income and Expenses

smsf NALI

Let’s have a chat about everyone’s favourite topic – Non-Arm’s Length Income (NALI). Okay, maybe it’s not your favourite, but it’s certainly important for keeping your fund on the right side of the ATO.

NALI: What’s the Go?

NALI is income your SMSF receives from transactions that aren’t conducted at arm’s length. In other words, it’s when your fund gets a better deal than it would from an unrelated party. The ATO isn’t keen on this and will tax NALI at the highest marginal rate. Recent legislation has introduced the concept of Non-Arm’s Length Expenses (NALE), which can also trigger NALI.

New Changes

The government’s been busy tweaking the NALI rules. As of 1 July 2024, there are new limits for SMSFs. The amount of NALI from a non-arm’s length general expense is now capped at twice the difference between the actual expense and the market rate. For example, if the market rate for an expense is $5,000, but your SMSF only pays $3,000, the maximum NALI would be $4,000 (2 x $2,000 difference).

This change aims to prevent minor discrepancies from resulting in all of your fund’s income being taxed at the highest rate. It’s a bit of relief for SMSF trustees, but it doesn’t mean we can let our guard down.

Trustee Remuneration

Now, here’s something crucial to remember: there are strict rules about paying SMSF trustees. Generally, trustees can’t be paid from the fund for their trustee duties. The only exception? If you’re providing services you genuinely offer to the public as part of your business.

For example, if you’re a licensed accountant and you do the books for your SMSF, you might be able to charge for this. But here’s the catch – you must charge market rates to avoid triggering NALI issues. It’s a fine line to walk!

Keeping Your SMSF Squeaky Clean

So, how do we keep our SMSF transactions on the right side of the ATO? Here are some tips:

  1. Document Everything: Keep detailed records of all transactions. If the ATO comes knocking, you’ll want to show them that everything’s above board.
  2. Stick to Market Rates: Whether you’re buying, selling, or providing services to your fund, make sure the price is right.
  3. Get Independent Valuations: When in doubt, get an independent valuation. It’s a small cost that could save you a big headache later.
  4. Be Careful with Related Party Dealings: These are prime targets for ATO scrutiny.
  5. Seek Professional Advice: If you’re unsure about a transaction, chat with a super specialist. It’s better to ask questions now than face penalties later.

Let’s say your SMSF owns a property, and you’re handy with a paintbrush. You might think, “I’ll just paint it myself and save the fund some money.” Hold up! That could be seen as the fund receiving a benefit at below market rates. Instead, consider paying a professional painter and supervising the work. That way, you’re still involved, but the transaction is at arm’s length.

Wrapping Up

Staying on top of NALI rules and trustee remuneration might seem like a hassle, but it’s essential for the health of your SMSF. The new limits provide some breathing room, but it’s still important to ensure all transactions are at arm’s length.

Remember, when it comes to your super, it’s always better to be safe than sorry. If you’re ever in doubt, reach out to Top SMSF. Your future self will thank you for it!

By following these guidelines and keeping an eye on the latest changes, you’ll be well-positioned to enjoy the benefits of your SMSF without running afoul of the ATO.

Wilbert is a Chartered Accountant. He started his career in accounting with a Melbourne practice, working with clients on all things tax and financial planning. Wilbert holds dual degrees from Monash University – Commerce and Business Information System. His interest in technology led him to creating his own IT practice, Champion IT where he builds website for financial planners and other professionals. He focuses on creating solutions and processes that are efficient, whether this be working on internal systems or working with business owners. When he is not busy with clients or managing his business, he spends most of his time reading, cycling, hiking and kayaking.

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