NALI provisions did not apply to loan structure

The Administrative Appeals Tribunal (‘AAT’) has held that interest income derived by a self-managed superannuation fund (‘SMSF’) as the sole beneficiary of a unit trust was not non-arm’s length income (‘NALI’), and so this income could still be treated as exempt current pension income.

During the 2015, 2016 and 2017 financial years, the unit trust lent money through two related entities to independent third parties who undertook development activities, through a series of loan arrangements. 

The interest income derived by the unit trust through these loan arrangements was distributed to the SMSF as sole unitholder and was treated as exempt current pension income. 

Following an audit, the ATO determined that the income was NALI, and therefore should not have been included as exempt current pension income.

The ATO then issued amended assessments for the relevant financial years, along with penalties.

While the AAT found that the parties were not dealing with each other at arm’s length, it also concluded that the income that the unit trust derived was not more than the amount it might have been expected to derive if the parties had been dealing at arm’s length.

Accordingly, the relevant interest income received by the SMSF was not NALI, and so the taxpayer’s objections to the amended tax assessments and penalties were allowed.

Disclaimer
This publication is intended as a general commentary only and does not purport to be comprehensive. It should not be regarded as tax advice and you should not act solely on the information contained herein. Please contact AscendPoint to further discuss about your circumstances or concerns.

NALI provisions did not apply to loan structure