• U Net non-arm’s length income

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    Show at U the net amount of ordinary income and statutory income that a complying superannuation fund, ADF or PST has derived from a scheme the parties to which were not dealing at arm’s length.

    This includes income such as:

    • private company dividends (including non-share dividends)
    • a share of net income from trusts
    • a net capital gain to the extent it reflects a non-arm’s length capital gain
    • other non-arm’s length income that is greater than might have been expected had it been derived from an arm’s length dealing.

    Income is non-arm’s length income if the parties to a scheme are not dealing at arm's length and the income derived from the scheme is greater than might have been expected had the parties been dealing at arm's length in relation to the scheme. This may include, for example, interest on loans, rent from property, profit on sale of assets and capital gains, and franking credits on dividends.

    The test for such income is a question of fact, and all of the circumstances of the relationship are relevant in determining whether the amount of income derived from a non-arm's length dealing is greater than might have been expected had the parties been dealing at arm's length, including the commercial risks undertaken by the fund.

    Each component of non-arm’s length income is reduced by any deductions attributable to that income and is then taxed at the highest marginal tax rate (currently 45%). Allowable deductions against that income are those that relate exclusively to the non-arm’s length component of income, and as much of other allowable deductions that appropriately relates to that income.

    If this amount is a loss, quarantine the loss for future offset against income of the same class. Do not show a loss at U but keep a record of the quarantined loss amount with the fund’s tax records.

    Non-arm’s length trust distributions

    A share of net income from a trust is non-arm's length income of a complying superannuation fund, complying ADF or PST if:

    • the fund or PST does not have a fixed entitlement to income from the trust (generally discretionary trusts); or
    • all of the following apply:
      • the fund or PST has a fixed entitlement to income from the trust
      • the fund or PST acquired the entitlement under an arrangement where the parties were not dealing at arms length, and
      • the fund’s or PST’s share of the net income is more than it would have been had the parties been dealing at arm’s length.
       

    If a fund or PST had a share of net income from a trust, examine the circumstances of the distribution to determine if the income is ‘non-arm’s length income’, as defined in sections 295-550 of the ITAA 1997. If the amount is non-arm’s length income include it at U.

    If net income included franked dividends (including franked non-share dividends), and the fund or PST is entitled to a franking credits tax offset in respect of any attached franking credits, gross up the share of net income by including the attached franking credits. Include the grossed up amount in the amount shown at U.

    For a complying superannuation fund, complying ADF or PST, include the amount of franking credits attached to such dividends at E1 Complying fund's franking credits tax offset item 12. For a non-complying superannuation fund or a non-complying ADF, include the amount of franking credit attached to such dividends at C2 Rebates and tax offsets item 12.

    If net income includes a capital gain, calculate the capital gain as per the instructions at A Net capital gain. To the extent the net capital gain reflects any non-arm’s length capital gain it should be shown at U.

    Non-arm’s length private company dividends

    An amount of ordinary income or statutory income is non-arm's length income if it is a dividend paid by a private company, or is reasonably attributable to such a dividend, unless the amount is consistent with an arm's length dealing.

    In deciding whether the amount is consistent with an arm’s length dealing consideration must be given to any connection between the private company and the fund, as well as any other relevant circumstance. Other relevant circumstances include:

    • the value of the shares held by the fund in the company
    • the cost to the fund of the shares on which the dividends were paid
    • the dividend rate on those shares
    • whether dividends have been paid on other shares in the company, and the dividend rate
    • whether the company has issued shares in lieu of dividends to the fund, and the circumstances of the issue.

    Find out more

    On determining when an amount is non-arm’s length income, see TR 2006/7 Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income.

    Gross up the amount of private company dividends (including non-share dividends) to include any attached franking credits and reduce this amount by any related deductions and show the result at U.

    For a complying superannuation fund, complying ADF or PST, include the amount of franking credits attached to such dividends at E1 Complying fund's franking credits tax offset item 12. For a non-complying superannuation fund or a non-complying ADF, include the amount of franking credits attached to such dividends at C2 Rebates and tax offsets item 12.

    If private company dividends (including non-share dividends) are consistent with an arm’s length dealing, such that the amount should not be treated as non-arm’s length income, the dividends received are taxed at 15%. Show these dividends at either J Unfranked dividend amount, or K Franked dividend amount and L Dividend franking credit or if applicable D Net foreign income and D1 Gross foreign income and E Australian franking credits from a New Zealand company.

    All income shown at U is taxed at 45%.

    Last modified: 02 Jun 2014QC 35420