Super funds: ATO approach to non-arm’s length income rules

Law Companion Ruling LCR 2021/2, issued on 28 July 2021, with effect from 1 July 2018, explains the recent changes to the non-arm’s length income (NALI) rules. Under the amendments, income is included in a super fund’s non-arm’s length component and taxed at 45% if there is a related-party scheme whereby non-arm’s length expenses (NALE) are incurred in gaining or producing that income (or no expenses are incurred but the fund might be expected to have incurred expenses if the transaction were on arm’s length terms).

The ATO says, in applying the amendments, it is necessary to determine: the steps of the relevant scheme, the parties dealing with each other under those steps and whether, within the identified steps of the scheme, the fund incurs NALE in gaining or producing income (or in acquiring a fixed entitlement to trust income). This requires a sufficient nexus between the expenditure and the relevant income. In the ATO’s view, NALE incurred to acquire an asset (including associated financing costs) will have a sufficient nexus to all ordinary or statutory income derived by the complying super fund in respect of that asset. This includes any capital gain derived on the disposal of the asset.