The long story of the NALI provisions have finally reached somewhat of a conclusion with the passing of the TLA (Support for Small Business and Charities and Other Measures) Bill 2023 on 28 June 2024. These provisions had previously been agreed to, however were delayed due to the inclusion of the instant asset write off measures included in the same bill.
The passing of these provisions resolves the uncertainty that clients were facing following the withdrawal of the ATO’s administrative guidance as at 30 June 2023 with respect to general expenses of a non arms length nature for an SMSF.
Broadly speaking, NALI occurs when an SMSF receives income exceeding the expected amount under arms length dealings, or from 1 July 2018, when an SMSF incurs a loss, outgoing or expense (including a NIL expense) that is below the amount expected had the parties been dealing on an arms length basis. The expenses may relate to a specific investment/asset or could be general expenses affecting the fund’s entire income.
The outcome? The related income is taxed at 45% instead of the standard 15% for SMSFs.
The legislation provides considerable relief to SMSFs as it provides a maximum limit on the amount that is taxed as NALI for non arms length general expenses. The upper cap will be twice the difference between the expected arms length expense (ie market value of the expense) and the actual expense incurred by the fund. General expenses include accounting, audit, general legal fees and general investment adviser costs.
Absent of the legislation passing, the ATO’s view was that even a minor non arms length general expense could trigger the entire income of the fund to be taxed at the penalty rate of 45%.
Importantly, the ATO’s view on NALI linked to specific expenses (ie expenses associated with a particular asset/s), such as maintenance for a rental property, remains unchanged. Non arms length specific expenses continue to cause all income related to that asset/s to be deemed to be NALI and taxed at the penalty rate of 45%, capital gains included.
Contact your WMS advisor with any questions or queries.
