A technical specialist has confirmed the Superannuation Industry (Supervision) (SIS) Regulations do not stipulate how a tax penalty incurred for a breach of the non-arm’s-length income (NALI) provisions is to be apportioned within an SMSF where the fund has both an accumulation and pension interest.
Accurium head of SMSF education Mark Ellem noted the situation in response to a question as to whether a NALI tax liability has to be allocated evenly to each existing interest if half of the fund was in accumulation phase and the other half was in pension phase.
To this end, Ellem noted SIS Regulation 5.02(3) only requires expenses incurred by the fund be distributed in a fair and reasonable manner between all of the fund members and the various kind of benefits of each member of the SMSF.
“So it will probably come back to your accounting system and your trust deed, as well as to how tax is apportioned. [The critical factor will be whether] tax is treated as a fund expense. So you’ve got gross earnings less expenses, which includes tax, [and gives you] your net earnings. You then allocate proportionately across member balances so you’re treating tax as a fund expense,” he noted.
“Or [is tax] being treated as a superannuation interest of the member? [In that case you could determine] this is a pension account and shouldn’t wear any tax.
“Look at your system, look at your accounting platform, look at your trust deed and keep in mind that requirement to allocate on a fair and reasonable basis.”
Accurium senior SMSF educator Anthony Cullen advised practitioners to pay close attention to the software provider their clients are using.
“It will come down to the software and [getting an] understanding of it because if you look at the three major providers, they will all deal with this in a slightly different way,” Cullen warned.
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