The Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019 could bring tax breaks loss for some Self-Managed Superannuation Fund (SMSF) trustees.
Although there are still some grey areas and the Australian Tax Office (ATO) is still in consultation with the industry on how to interpret the law, the amendment could still affect trustees who do their own accounts or improve their own assets, like investment property in their portfolio.
The change could result to a tax rate of 45 per cent on taxable income of the fund in a financial year.
The legislation was made to clarify SMSF’s non-arm’s length expenditure (NALE). Because the Australian Taxation Office (ATO) wants SMSFs to have arm’s-length expenditure and income, any non-arm’s length income (NALI) is taxed at the highest marginal rate.
Arm’s length transaction is a transaction between two independent parties in which both parties are acting in their own self-interest.
Trustees of SMSFs who fail to follow the arm’s length rule will incur tax penalties on their income-producing assets. This makes it important to distinguish between personal and professional services an SMSF receives.
So if a trustee is employed at an accounting firm and uses that same firm for accounting services for their fund at no cost, that constitutes a non-arm’s length transaction and all the income earned by the SMSF in that financial year are considered non-arm’s length.
As such, the trustee’s tax liability will be at its top marginal rate and no tax breaks can be expected unless the fund pays for the accounting services at the current market rate.
However, and this is where the confusion lays, if the SMSF trustee, in his capacity as a trustee provides accounting services, then no fee must be paid and the SMSF fund will still have tax breaks.
Providing accounting services as a trustee, while employed in an accounting firm, is tricky though. You must not use any of the firm’s equipment or assets and you must not lodge the annual return using your firm’s tax agent registration. If you can do that, then there is no need to charge the fund for this service as this forms part of the duties and responsibilities of a “trustee.”
Loss of SMSF Tax Breaks May Be Too Much
Aside from the potential confusion between a trustee performing in a trustee capacity and a trustee providing a professional service, the SMSF industry fears the loss of tax breaks may be too much.
They question the penalty of the SMSF’s income being declared as non-arm’s length income (NALI) and taxed at the trustee’s top marginal tax rate, as something that is maybe too high a price to pay.
They argue that expenses like accounting fees occur too late to produce any effect on income, in the same way, that legal, financial planning and financial advice fees occur too soon to be a part of the income-producing process.
The new law is backdated 1 July 2018 but the ATO said it will be lenient on compliance and tax breaks until the end of this financial year.
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