If you manage a self-managed super fund (SMSF), recent changes to tax rules for certain fund expenses could impact your fund’s tax liabilities. These changes apply even to services provided for free or below market rates. Understanding these new rules is essential to avoid unexpected tax consequences.

Understanding the New Rules

The updated regulations focus on “non-arm’s length general expenses” — expenses for services provided to your SMSF at below-market prices or for free. Income related to these general expenses may be classified as “non-arm’s length income” (NALI) and taxed at a rate of 45%. Although there are limits on how much income can be taxed under these rules, the financial impact can still be substantial.

These rules came into effect on 29 June 2024, with retroactive application from 1 July 2018. They address previous regulations that were considered too strict and largely unenforced from 2018-19 to 2022-23.

Key Points to Consider

• General Expenses: The new rules apply to general expenses not charged at market rates. This includes costs that are not tied to a specific fund asset, such as general accounting fees or non-specific investment advice.
• Trustee Roles: As a trustee, you typically cannot charge for your duties under superannuation law. However, if you provide services to your SMSF at a discount or for free in a professional capacity (e.g., as an accountant, auditor, or financial adviser), the NALI rules may apply.
• NALI Limits: The NALI amount is capped at twice the difference between the actual expense and the market rate. If no expense is charged, the cap is set at twice the market rate.
• Overall Cap: The non-arm’s length component of income cannot exceed the SMSF’s taxable income (minus assessable contributions plus related deductions).

An Example to Illustrate

Consider Ted, an accountant and trustee of his SMSF. Ted provides accounting services to his fund for free, services which normally cost $3,000 annually. Since these services are general expenses and not related to specific assets, and Ted provided them in his professional capacity, the NALI rules apply.

The NALI amount is calculated as twice the value of the services: 2 x $3,000 = $6,000. If Ted’s SMSF has $15,000 in taxable income and no assessable contributions, the NALI component is capped at the lower of $15,000 or $6,000. Thus, $6,000 is taxed at 45%, resulting in an extra $2,700 in tax for Ted’s fund.

What This Means for You

These new rules may catch professionals off-guard if they try to save their SMSF money by providing services for free or at discounted rates. Key takeaways include:

• Be cautious about providing free or discounted services to your SMSF.
• Consider the potential tax implications of not charging market rates.
• Remember, services provided in a professional capacity may be subject to these rules, leading to significant tax consequences.

What to Do Next

If you’re uncertain about how these rules affect your SMSF, consult with a tax adviser. They can help you determine if your fund’s expenses are subject to the new rules and advise on any necessary changes. Balancing cost-saving measures with regulatory compliance is crucial to ensure your SMSF operates effectively within the new framework.

For further advice and support, please contact our office.