Learn about the non-arm’s length income rules and the confirmed tax on super earnings above $3 million, and how it affects super funds and investors in this informative article.
Clarifying the non-arm’s length income rules for superfunds
The Non-Arm’s Length Income (NALI) rules aim to prevent superannuation trustees from artificially inflating the fund’s balance and obtaining preferential tax treatment by disregarding expenses incurred by the fund provided by a related party at a reduced rate. For instance, if your brother provides accounting services to your SMSF for free instead of charging $5k, it may be deemed non-arm’s length income and taxed at the top marginal tax rate.
Expenses are divided into two categories: general and specific. General expenses relate to all of the fund’s income, such as accounting and audit fees, while specific expenses relate to a particular asset, such as maintenance expenses on a property owned by an SMSF.
A Treasury consultation paper recommended amending NALI in January 2023, proposing a cap of five times the breach amount for taxable fund income as NALI. The Budget confirmed that the cap would be twice the level of a general expense.
Furthermore, fund income taxable as NALI will not include contributions, and expenditure before the 2018-19 income year will be exempt.
Finally, large APRA regulated funds will be exempt from both general and specific expenses under the NALI provisions, as per the consultation.
Confirmed 30% tax on super earnings above $3 million
| From | 1 July 2025 |
Starting from 1 July 2025, an additional tax of 15% will be imposed on the earnings of individuals whose total superannuation balance exceeds $3 million at the end of a financial year. The definition of the total superannuation balance (TSB) for this new tax includes amounts in retirement phase pensions and follows the current definition. The tax calculation intends to capture the growth in TSB over the financial year, taking into account contributions, insurance proceeds, and withdrawals.
This method accounts for both realised and unrealised gains, allowing negative earnings to be carried forward and offset against future years. Defined benefit schemes’ interests will be valued appropriately and taxed similarly to other interests under this measure.
Taxpayers can choose to pay the tax personally or from their superannuation fund, and individuals with multiple accounts can nominate which fund will bear the tax.
This measure is expected to boost tax receipts by $950m and increase payments by $47.6m over the next five years, starting from 2022-23.
Don’t hesitate to reach out to us to discuss how these changes may affect you or your business.
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