TAX FILES
Self-managed super funds: Beware of NALI! BRIONY HUTCHENS, DW FOX TUCKER LAWYERS
N
on-arm’s length income, commonly referred to as NALI, is not a new concept for superannuation funds. However changes made to the provisions in 2018, combined with the Commissioner’s views as published in Law Companion Ruling 2021/2 as to how those changes apply, are causing significant concerns and potential tax implications for many superannuation funds.
What is NALI? A complying superannuation fund’s taxable income is split into 2 components – a low tax component which is taxed at 15%, and non-arms length income (NALI) which is taxed at the top marginal rate. NALI is defined in section 295-550 of the Income Tax Assessment Act 1997 and can arise a number of different ways, including: • dividends received from a private company; • distributions from a trust other than by reason of holding a fixed entitlement to that income (e.g. distributions from a discretionary trust); • income derived from a non-arm’s length dealing; and • income derived from a trust as a result of holding a fixed entitlement to that income where either the entitlement was acquired under a non-arm’s length dealing, or the trust itself derived income under a non-arm’s length dealing. Importantly, where a non-arm’s length dealing is required, that dealing must result in the relevant amount of income of the complying superannuation fund being more than would otherwise be expected had the parties been dealing at arm’s length. 2018 Amendments Section 295-550 was amended in 2018 to expand the definition of NALI (in so far as it relates to non-arm’s length dealings and income derived from a trust as a result of holding a fixed entitlement to
36 THE BULLETIN February 2022
that income) so that the relevant issue was not just the amount of income directly derived by the superannuation fund from that dealing or fixed entitlement, but also whether the superannuation fund, as part of a scheme involving the acquisition of the fixed entitlement or the gaining or producing of the income: • incurred a loss, outgoing or expenditure which was less than might have been expected had the parties been dealing at arm’s length in relation to the scheme; or • did not incur a loss, outgoing or expenditure that the entity might have been expected to incur if the parties had been dealing at arm’s length in relation to the scheme. In each of the above instances, the effect is that the net income of the fund (i.e. income less expenses/deductions) would be greater than it would otherwise be, resulting in potential NALI. This significantly expanded the scope of NALI and brought into focus not just the income derived by superannuation funds, but also the expenses that the funds incurred. More significantly, the Commissioner’s views on how these provisions apply have the potential for income from a particular investment to be NALI for the life of the investment or, alternatively, for the whole of the income of the superannuation fund to be treated as NALI. LCR 2021/2 The Commissioner has released Law Companion Ruling 2021/2 which provides guidance on the application of the legislative changes referred to above. This ruling is in addition to the previous Taxation Ruling 2006/7 (which is still valid and in force) which provides wider guidance in relation to the NALI rules in general. The ruling addresses a number of issues in relation to the application of the non-arm’s length expenditure provisions. Significantly, the ruling provides that:
•
•
•
•
there must be a sufficient nexus between the non-arm’s length expenditure and the relevant ordinary or statutory income; the relevant expenditure may be of a revenue or capital nature and does not have to be deductible under section 8-1 for the non-arm’s length expenditure provisions to apply; where the initial expenditure incurred to acquire an asset (including associated financing costs) is considered to be non-arm’s length, that expenditure taints all of the ordinary or statutory income derived by the superannuation fund in respect of that asset, including any capital gains on disposal of the asset, forever more. This remains the case even where any initial non-arm’s length borrowings are refinanced subsequently to be on arm’s length terms. In some instances, the non-arm’s length expenditure will have a sufficient nexus to all of the ordinary and/or statutory income derived by the fund, meaning that all of the income of the fund could be NALI in the year in which the expenditure was incurred (or not incurred). Examples given include: ○ Certain actuarial costs ○ Certain accounting fees ○ Audit fees ○ Certain costs of complying with regulatory provisions under the Superannuation Industry (Supervision) Act 1993 ○ Fees and premiums under an indemnity insurance policy ○ Investment adviser fees and costs ○ Other administrative costs
Acquisition costs Some of the widest reaching implications from these amendments arise from the Commissioner’s position that any non-arm’s length expenditure in relation to the acquisition of an investment will cause all income and capital gains derived from that investment to be NALI for the life
