The arm’s length income rule is an integrity rule that only applies if the Commissioner makes a determination:
- specifying an amount of non-arm’s length income, for a MIT for a specified income year
- where the amount of non-arm’s length income is reflected in either the trust components of an AMIT or the net income of a MIT.
The determination does not form part of an assessment but may be included with a notice of assessment. If you receive a determination you disagree with, you may lodge an objection.
Consequences of a determination
Once the determination is made, the amount of income exceeding an arm’s length amount (less any deductions relating only to that excess amount) will be taxed at the standard corporate tax rate of 30%.
To prevent double taxation for an AMIT the amount of non-arm’s length income is taxed at the corporate rate and taken to be an 'over' in the year of the determination.
For a MIT that is not an AMIT (Non-AMIT) the net income is reduced by the amount subject to trustee taxation at the corporate rate – for the income year to which the determination relates.
For example, the Commissioner of Taxation makes a determination on 31 August 2021 about a Non-AMIT's 2019 income year. The Non-AMIT is required to reduce its net income for the 2019 year by the amount of non-arm’s length income the trustee was taxed on at the corporate rate.
Note: The determination does not necessarily mean the trust is a trading trust within the meaning of Division 6C.
Trustee can be subject to an administrative penalty
An administrative penalty is imposed on taxpayers entering into schemes to reduce their tax liabilities, including schemes to derive non-arm’s length income.
The trustee of a MIT or AMIT is liable to an administrative penalty if we amend an assessment issued to the trustee for the income year and, as a result, the trustee is liable to pay an additional amount of income tax.