Show download pdf controls
  • Non-arm’s length income

    SMSFs must transact on an arm's-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset, and the income from assets held by your fund should always reflect the true market rate of return.

    Any non-arm's length income (NALI) is taxed at the highest marginal rate.

    Broadly, income is NALI for a complying SMSF if it is:

    • derived from a scheme in which the parties weren't dealing with each other at arm's length, and
    • more than the SMSF might have been expected to derive if the parties had been dealing with each other at arm's length.

    Types of NALI income

    Income derived by an SMSF as a beneficiary of a discretionary trust is NALI, as are dividends paid to an SMSF by a private company (unless the dividend is consistent with arm's-length dealing).

    Income derived by an SMSF as a beneficiary of a trust through holding a fixed entitlement to the income of the trust will also be NALI where:

    • the SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which the parties weren't dealing with each other at arm's length, and
    • the income is more than the SMSF would have been expected to derive if the parties had been dealing with each other at arm's length

    From 1 July 2018, the definition of NALI was expanded to also include income derived by an SMSF from a scheme in which the parties weren't dealing with each at arm's length where the fund incurred expenses in deriving the income that are less than, including nil expenses, those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm's-length basis.

    The expenses may be of a revenue or capital nature in the same way that NALI may be statutory or ordinary income.

    From 1 July 2018 the law was also amended to ensure that income derived by an SMSF in the capacity of beneficiary of a trust through holding a fixed entitlement to the income of the trust will be NALI where:

    • the SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which parties weren't dealing with each other at arm's length, and
    • the SMSF incurred expenses in acquiring the entitlement or deriving the income that are less than, including nil expenses, what the SMSF would otherwise have been expected to incur if the parties were dealing on an arm's length basis.

    See also:

    Last modified: 04 Oct 2019QC 23345