Upcoming changes to NALI provisions

Update on NALI amendments for SMSF general expenses

In the 2023 Federal Budget, the federal government has flagged changes to non-arm's length income (NALI) provisions including a change to the operation of NALI rules to include a situation where an SMSF would not pay an expense on arm's-length terms.

Key points

• As the proposal is to change the legislation with an effective date of 1 July 2023, trustees must ensure that fund general expenses are adequately paid for
• In particular, SMSF trustees should pay particular attention where the fund members cannot make contributions to the fund
• SMSF trustees are also reminded that there is no change to NALI rules where an expense relates to a specific asset. Where an asset becomes tainted due to the underpayment of expenses the asset becomes tainted for the life the asset is held by the SMSF.

Exposure draft legislation proposes a change to the rules where NALI income would be limited to two times any general expense that is not paid at arm's-length.

An unintended consequence of the 2018 law change was that all income of an SMSF would become NALI, and taxed at the top marginal rate, if a general expense was not paid at arm's-length. The NALI measure, announced by the Coalition government in 2022, will be amended to provide greater certainty to taxpayers.

The intention of the proposal is to include a factor-based approach for trustees to be able to adequately calculate the amount of SMSF income that is NALI income. This factor-based approach applies to a situation where general expenses of the fund are not at arm's-length amounts.

Examples of the types of general expense include:

• Actuarial costs
• Accountancy fees
• Audit fees
• Costs of complying with a regulatory provision of the SIS Act
• Trustee fees and premiums under an indemnity insurance policy
• Costs in connection with the calculation and payment of benefits to members
• Investment advisor fees and costs in providing pre-retirement services to members, and
• Other administrative costs incurred in managing the fund.

Amending (and limiting) the non-arm’s-length income provisions which apply to expenditure incurred by superannuation funds was an important Budgetary measure.

Non-arm’s-length income (NALI)

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. NALI tax rate is set at the highest marginal tax rate.

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

• Derived from a scheme in which the parties were not dealing with each other at arm's-length
• More than the SMSF might have been expected to derive if the parties had been dealing with each other at arm's-length.

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