If your self-managed super fund (SMSF) engages in transactions with related parties, it can give rise to non-arm’s length income which can have significant tax implications. This article explains what non-arm’s length income is and what SMSF trustees need to know.
What is Non-Arm’s Length Income?
A non-arm’s length income transaction is one where the parties are not entirely independent of each other. For an SMSF, this means any transaction between the fund and:
– A member or their relative
– An employer sponsoring the fund
– An entity owned or controlled by a fund member or relative
Common examples include:
– Paying an excessive price for an asset purchased from a member’s business
– Paying above market rates on a property leased from a related party
– Charging lower than commercial rents on fund property used by a member or relative
Tax Implications
Non-arm’s length income of an SMSF is taxed at the top marginal rate rather than the concessional 15% rate. This can significantly increase an SMSF’s tax liability if significant non-arm’s length income is derived.
The total non-arm’s length income will also count towards the income threshold for an SMSF to retain its special tax status.
What Should Trustees Do?
To avoid significant tax implications, SMSF trustees should:
– Carefully assess if certain transactions or arrangements could create non-arm’s length income
– Ensure all transactions with related parties are conducted strictly on commercial terms
– Maintain documentation to prove transactions are at market value
– Consider getting valuations for significant transactions with related parties
By being aware of non-arm’s length income issues and taking precautionary steps, trustees can help their SMSF comply with the rules and avoid higher taxes.