The Treasury Laws Amendment Act 2019 may bring tax break loss to some SMSF trustees. The new legislation is yet to be clearly interpreted but it could still impact trustees who do their own accounts or improve their own assets.
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The amendment could lead to a 45% tax rate on taxable income of the fund in a financial year. It aims to clarify SMSF’s NALE (non-arm’s length expenditure). The ATO wants SMSFs to have NALE and income, so any NALI (non-arm’s length income) will be taxed at the highest marginal rate. Arm’s length transactions are ones between two independent parties who act in their own self-interest.
SMSF trustees who don’t comply with the rule will incur tax penalties on their income-producing assets so it’s important to distinguish between the professional and personal services an SMSF receives. Trustees who are employed at a firm and use services from the same firm for their funds at no cost constitute a non-arm’s length transaction and all income earned by the SMSF in that financial year are considered non-arm’s length. The trustee’s tax liability will be at the top marginal rate and there will be no tax breaks unless the fund pays for the services at the current market rate.
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However, if the SMSF trustee provides services as a trustee, no fee must be paid and the SMSF fund will have tax breaks. Doing so can be tricky, though. The firm’s equipment or assets must not be used and the annual return must not be lodged using the firm’s tax agent registration. There will be no need to charge the fund for the service because this will form part of the duties of the trustee.
The SMSF industry is concerned that the loss of tax breaks is too much. They question the penalty of the NALI-declared SMSF income and taxing it at the trustee’s highest marginal tax rate. According to them, expenses like professional fees (accounting, legal, financial planning and advice) occur too late to have any effect on income.
The new legislation is backdated 1 July 2018 but the ATO will be lenient on tax breaks and compliance until the end of this financial year.
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