Non arm's length income (NALI) derived by SMSF's has always been on the radar of the ATO, but now new rules expand this principle to non-arm's length expenses (NALE) - and the rules have the potential to be worse than those applying to income.

Until now SMSF's must always transact on an arm's length basis. The purchase and sale of assets needs to be at market value and the income from those assets should always reflect true commercial returns. From 1 July 2018 the ATO says the fund's expenses should also reflect commercial terms. (The new rules apply to income derived in the 2018/19 year or later, regardless of whether the scheme was entered into before 1 July 2018.)

Section 295-550 of the Income Tax Assessment Act 1997 was amended from 1 July 2018 to include income derived from a transaction where the expenses incurred are not on an arm's length basis as NALI and Tax it at 45%. The expenses may be either revenue or capital in nature.

This is bad enough where the expense in question actually relates to a specific income amount - but what if the deemed non-commercial expense doesn't relate to a specific transaction? (such as an accountant preparing the financial statements and Tax return for their own SMSF?) In this instance it seems all of the income of the fund (including concessional contributions) will be treated as non-arm's length and be Taxed at 45%. These new rules could have wide reaching application. Lawyers, accountants, finance brokers, stock brokers, bookkeepers, real estate agents, builders, landscapers etc. A member or trustee, who performs services for their fund, using any property or licences (including software) of their employer, but doesn't charge for it or charges less than market value, is likely be caught by these new rules.

The simple act of popping something in the mail through your employer's mailing system can trigger the NALE provisions if the fund doesn't pay the employer for the postage. All of the income, including the concessional contributions, may be subject to 45% Tax all for the sake of a $1 postage stamp. There is no materiality or safe harbour provisions in the legislation.

LCR2019/D3 'Non-arm's length income - expenditure incurred under a non-arm's length arrangement' provides a number of examples of NALI and is intended to apply to income derived in the 2018-19 year.