Clarifying Rules of the Non-Arms Length Income for Super Funds

The rules of non-arms length income (NALI) prevent trustees of superannuation from artificially increasing the fund balance, and getting access to preferential tax treatment on the higher amount, by failing to identify expenses incurred by the fund given by a related party at a reduced rate.

Currently, any money earned could be considered to be non-arm’s length income and subject to taxation at the highest marginal tax rate where expenses made by the fund are not at arm’s length and below market prices. The two types of expenses are general and specific. All of the fund’s income is related to general expenses, such as audit and accounting fees. Specific costs are associated with a particular asset, such as maintenance costs for a property owned by an SMSF.

The Treasury suggested changes to the way NALI is handled in a consultation paper that was published in January 2023. The consultation suggested capping fund income that is taxable as NALI to five times the breach’s amount. This cap is confirmed in the budget to be twice as high as a general expense.

Apart from this, contributions will be excluded from the fund income taxable as NALI. Expenses incurred before the 2018-19 income year will be exempt. According to the consultation, large APRA-regulated funds will be exempted from NALI provisions for both specific and general expenses of the fund.

30% Tax on Super Earnings Over $3m

An additional 15% tax will be applied to super earnings over $3m at the end of the financial year from 1 July 2025. Tax calculation aims to identify the growth in the total superannuation balance over the financial year enabling contributions and withdrawals. This method identifies both unrealised and realised gains, allowing negative earnings to be carried forward and offset against future years.

Interest in a defined benefit scheme will be valued and will have earnings taxed under this measure. Individuals can pay the tax personally or from their super fund, and those with various accounts can nominate that fund will pay the tax. It has been estimated that this measure will increase tax receipts by $950m. By $47.6m, increase payments over the 5 years from 2022-23.