The ATO is reminding self-managed super funds (SMSFs) of the rules regarding non-arm’s length income from trusts.
The non-arm’s length income rules can apply to investments, transactions and other arrangements undertaken by SMSFs when the terms of the relevant investment, transaction or arrangement are uncommercial in nature.
If income is distributed from a discretionary to a SMSF beneficiary, it is:
– automatically deemed non-arm’s length income of the SMSF (regardless of the nature of the dealings of the relevant parties)
– taxable at the highest marginal tax rate.
Income received by a SMSF that is a fixed entitlement to trust income is also non-arm’s length income if it is:
– income from a scheme where the parties were not dealing with each other at arm’s length
– more than the SMSF might have expected to derive if the parties were dealing with each other at arm’s length.
If you are unsure whether income from trusts is considered arm’s length income, contact our office.
When a downsizer contribution is ineligible, the fund must re-assess the amount in accordance with the Superannuation Industry (Supervision) Regulations 1994 and the trust deed. This is to determine if the amount can be retained as a non-concessional contribution.
Provided the trust deed allows so, the fund can return the contribution to the member or adjust the prior downsizing contributions to nil and report this amount as a non-concessional contribution when the member meets the age and work tests.
When a contribution can’t be returned or returned in full: Members who no longer have a super interest with the fund, or an insufficient return amount, must have their contribution re-reported as non-concessional, even if the contribution was returned because the member did not meet the age/work tests. Some of the contribution may be an excess non-concessional contribution (ENCC). Regardless of the age of the member, if this is the case the member will receive an ENCC determination or when the fund can’t return the full amount. Members will continue to have access to all review rights under the ENCC scheme. Even if the member is in pension phase, the funds will still need to return an ineligible downsizer contribution if it cannot be accepted.
When a fund receives a release authority: An amount released under these circumstances is treated as a super lump sum as it is a portion of the member’s super interest. Being in pension phase doesn’t prevent a fund from complying with the release authority although it may mean the full amount can’t be released, as the available balance may be lower than the amount stated in the release authority. Where the member’s available balance is lower than the release authority amount, the fund must release the maximum amount available.
The ATO monitors the rectification of this contribution reporting. Where funds don’t act within legislative timeframes, the Australian Prudential Regulation Authority (APRA) may be contacted.
