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Superannuation & Investors

Superannuation & Investors

Defining the rules for super funds’ non-arm’s-length income

The NALI rule ensures that superannuation trustees are not able to receive beneficial tax treatment on an inflated balance as a result of failing to identify expenses incurred by the fund that were donated by a linked party at a discounted rate. This prevents trustees from receiving the benefit of favourable tax treatment on an inflated balance.

To give you an example, your brother is a certified public accountant, and he does all of the bookkeeping for your self-managed super fund (SMSF) even though he doesn’t get paid for it. 

It is possible that the income from a fund that incurs expenses that are not at arm’s length and below market rates will be regarded as non-arm’s length income and will be liable to taxation at the highest marginal rate. Costs can be broken down into two categories: total and targeted. 

Costs associated with accounting and auditing are two examples of general expenses that have an impact on the entirety of the fund. One example of a specific expense would be the amount that must be paid for the upkeep of a property that is owned by an SMSF.

The NALI was the subject of a consultation paper that was sent by the Treasury Department in January 2023. As a result of the consultation, it was determined that the maximum amount of fund income that might be taxed as NALI ought to be established at five times the amount of the violation. This restriction, which is determined to be double the level of a general expense, has been validated in the budget. 

It is interesting to note that the terminology has shifted from a multiple of the breach to a multiple of the entire expense as a result of this adjustment. The result might be different if an expense was only partially covered (for instance, if an SMSF paid $1,000 for services worth $5,000), as this would mean that the expense was only partially covered. Please present a draught bill so that we can verify this information.

In addition, contributions will not be counted towards the total revenue of the NALI taxable fund. 

Any costs that were incurred prior to the 2018–19 tax year will be eligible for a deduction. 

Additionally, as a result of the consultation, it was decided that large APRA-regulated funds would be excluded from the rules imposed by NALI for both general and specific fund expenses.

Verified 30% tax on excess retirement income above $3 million

Starting on July 1, 2025, an extra 15% will be imposed on the profits of individuals’ superannuation funds if the entire balance of their superannuation funds at the end of a financial year is more than three million dollars. The current definition of TSB (total superannuation balance) is used to calculate the new tax, and it takes into account pension payments paid at any point during the retirement phase.

The tax is meant to be reflective of TSB’s growth over the course of the fiscal year, taking into account both deposits and withdrawals (including insurance proceeds). This method takes into account both achieved and unrealised gains, and it also enables losses to be carried forwards and exploited in later years.

As a result of this framework, earnings from interests in defined benefit plans will be taxed in the same manner as earnings from other types of interests and will be given a fair valuation.

Those individuals who have more than one superannuation account will have the option to select which of their accounts will be utilised to pay the tax obligation.

It is anticipated that taking this measure will increase tax revenues by $950 million.