Daniel Butler, director of DBA Lawyers, said if dealings are not done at arm’s length, section 295-222(5)(a) can result in the entire distribution and potentially future capital gains being taxed as NALI.
“An example of this is rent that is above market or interest on loans below market,” Butler said.
“NALI can also apply in relation to a unit trust under s 295-550(5)(b) and (c) where an SMSF in acquiring the units or in gaining or producing the income, the fund incurs a loss, outgoing or expense that is lower than arm’s length; or the fund does not incur a loss, outgoing or a nil expense due to a non-arm’s length dealing.”
Butler added that although these two conditions were introduced at the end of the 2024 financial year, they are still effective from 1 July 2018.
He continued that an example in LCR 2021/2 highlights the way in which unit trusts can be impacted by NALI if dealings are not done at arm’s length.
“In example 12 of the LCR, it states Scott’s SMSF acquires units in a listed unit trust under a non-commercial LRBA, which is considered NALI and any capital gain subsequently realised would also be NALE under s 295-550,” he said.
“If the trust is non-fixed, all distributions are treated as NALI and taxed at 45 per cent under s 295-550(4). Moreover, a distribution from a discretionary trust is treated as a contribution by the commissioner, so you’ve got a double whammy as it may also be taxed as a contribution as the ATO considers the SMSF has no investment in an fixed trust.”
For this reason, Butler said, it is best to ensure the unit trust is fixed and the unit trust deed should be reviewed and varied if needed to ensure it will pass as a fixed trust.
“There’s a number of hallmarks that we look for as to whether a trust is fixed or non-fixed, but if it falls in the category of non-fixed, you have a lot of problems. That is, everything would be NALI,” he said.
“There is also the 75 per cent test that comes from a 2011 federal court decision (Colonial First State Investments Limited v CoT [2011] FCA 16). In that decision, 75 per cent was not good enough. That’s why I say a quick reference [is to ask] is it 100 per cent majority required to vary the deed? Unless it is, this decision would suggest it’s not fixed.”
He said the regulations are more generous in TR 2006/7, but less generous in PCG 2016/16 and it depends on the finer reading of those materials as to where you might stand.
“We would recommend you only have a fixed trust when you’re dealing with a super fund because of that little bit of uncertainty there,” he said.
