COMPLIANCE
The unit trust NALI factor There is a danger certain arrangements currently in place for SMSFs with unit trust holdings may be penalised under the non-arm’s-length income and expense rules, write Daniel Butler and Bryce Figot.
DANIEL BUTLER (pictured) is director and lawyer and BRYCE FIGOT is special counsel at DBA Lawyers.
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There are a considerable number of SMSFs that invest in private unit trusts. These unit trusts may include pre-1999 unit trusts, unrelated unit trusts and non-geared unit trusts under division 13.3A of the Superannuation Industry (Supervision) (SIS) Regulations 1994. The ATO’s draft Law Companion Ruling (LCR) 2019/D3 outlines, among other things, the regulator’s view in relation to when a loss, outgoing or expense invokes non-arm’s-length income (NALI) under the section addressing nonarm’s-length dealings with fixed or unit trusts. In particular, this article focuses on paragraphs (b) and (c) of section 295-550(5) of the Income Tax Assessment Act 1997 (ITAA). Where an expense is incurred at a less than
commercial amount it will give rise to NALI. This is commonly referred to as NALE or a non-arm’slength expense. There has not been much publicity relating to how NALE applies to unit trusts for a number of years, but this does not diminish the importance of the issue.
NALI – fixed entitlements to trust income From 1 July 2018 an important change occurred to section 295-550(5) of the ITAA through the
