The ATO has released its ruling, LCR 2021/2, on non-arm’s length income and expenditure provisions that apply to all super funds.

The ruling was released on 28 July 2021.

This article should be read in conjunction with 'ATO publishes final ruling on non-arm’s length tax rules for all super funds - Part 2' and 'ATO publishes final ruling on non-arm’s length tax rules for all super funds - Part 3'.

Super fund income and expense anti-avoidance measure

The ruling discusses amendments to the income tax laws applying to superannuation funds. The amendments commenced on 1 July 2018.

The amendments were originally announced in the 2017 Federal Budget:

From 1 July 2018, the Government will further improve the integrity of the superannuation system by reducing opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.

The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis. 

This measure will ensure the 2016-17 Superannuation Reform Package operates as intended and is estimated to have a gain to revenue of $20.0 million over the forward estimates period. (Source: Budget Paper No. 2, p. 34)

A non-arm’s length arrangement exists where the trustee of an SMSF enters into a transaction with a party, often a related party, where in respect of the dealing the outcome is not reflective of real bargaining - for example, where a member loans funds to their SMSF or leases a business real property at above market rates from the SMSF. These dealings will usually be on better terms than can be obtained from a third party, e.g. no interest or higher rent.

Legislation was then introduced into Parliament for these rules in April 2018. This legislation lapsed because of the 2019 Federal election. The same legislation was introduced again in July 2019 and received Royal Assent on 2 October 2019, but its commencement was backdated to 1 July 2018.

In LCR 2021/2 the ATO shows that these new rules apply in a much broader range of circumstances than most thought the original government announcements said it was targeted at.

Existing NALI rules haven’t changed

The amendments made by the relevant legislation retains the existing non-arm’s length anti-avoidance rules. These rules are explained in TR 2006/7 (although this ruling refers to old Income Tax Assessment Act 1936 provisions the ATO has announced the ruling applies to its replacement – namely Sec 295-550 in the Income Tax Assessment Act 1997).

CA ANZ Member queries

CA ANZ members with questions about this ruling should contact us at: [email protected].