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, in relation to a MIT for a specified income year.
The Commissioner can make a determination 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
If the Commissioner makes a determination in relation to non-arm’s length income, the amount of non-arm's length income exceeding the amount that would have been expected if the parties had dealt with each other at arm’s length (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 subject to tax at the corporate rate is taken to be an 'over' or an increase in an 'over' in the year in which the determination is made. For a MIT that is not an AMIT, the trust's net income is reduced by the amount subject to trustee taxation at the corporate rate.
The determination does not necessarily mean that 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 who enter into a scheme to reduce their tax liabilities, including when the trustee of a MIT or AMIT enters into a scheme to derive non-arm’s length income.
The trustee of a MIT or AMIT will be 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.
Find out more:
Penalties for AMITs