The Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2024 was passed by Parliament and received Royal Assent on 28 June 2024.
We wrote about the proposed legislation in our previous client alert here.
Legislation changes effective from 1 July 2024
The Bill amends the application of the non-arm’s length expense (NALE) rules for superannuation funds, with the following changes taking effect from 1 July 2024:
- The amendments limit the amount of potential non-arm’s length income (NALI) arising from a non-arm's length general expenses to twice the difference between the actual expense and the expected market rate of the expense. However, for specific expenses, the entire income derived from those transactions will still be taxed as NALI.
- Large APRA regulated funds are excluded from the NALE provisions for both general and specific expenses of the fund, though they remain subject to broader NALI regulations.
- Expenditures incurred prior to 1 July 2018 are exempt from NALE provisions.
What does this mean for SMSF Trustees?
As these changes are retrospective and apply from 1 July 2018, SMSF Trustees must consider any implications for their Fund and ensure compliance with the new regulations regarding non-arm's length general expenses.
If you are concerned that your SMSF may have incurred non-arm’s length expenditure or is at risk of incurring non-arm’s length expenditure, it is essential to review current arrangements and implement necessary changes.
Example
Mary and John are the two trustees of their SMSF.
Mary is a lawyer and provides general legal services to the SMSF. She doesn’t charge the SMSF for this service, which usually costs around $4,500 for normal clients. The acquisition of legal services by the SMSF constitutes a scheme between Mary and the SMSF in which the parties were not dealing with each other at arm’s length. As the legal services were general in nature and did not relate to any particular asset, it is a general non-arm’s length expense. The amount potentially subject to non-arm’s length income arising from this arrangement is $9,000 (being the $4,500 market value for the service x 2) and this income will be taxed at 45 per cent.
John is a licensed builder and he blocks time out of his work calendar to conduct renovations on the SMSF’s rental property worth $50,000, for which he only charges $5,000 to the SMSF. The renovation costs were expenses incurred in deriving income from a particular asset, which is the rental property in this case, therefore, it is a specific non-arm’s length expense. As the SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income, the entire rental income (and any capital gain realised upon the eventual sale of the property) will be classified as NALI and will be taxed at the highest marginal rate.
We’re here to help
Our national Superannuation team is here to help you navigate these changes. We can review your SMSF's current arrangements, provide tailored advice on how the new rules apply to your situation, and develop an action plan to ensure that all transactions comply with arm's length requirements.
Learn more about how our Superannuation and SMSF services can help you
