The ATO says that ‘it has become common within some parts of the superannuation industry for a person to pay an expense on behalf of a superannuation fund.’
In this article, we consider whether that can cause non-arm’s length income (NALI) and/or a contribution.
How the situation might arise
Consider a situation where a related party pays an expense on behalf of an SMSF. This might include, for example, where an SMSF member personally pays an accounting invoice on behalf of the SMSF.
ATO’s primary position — don’t do it
The ATO’s primary position is ideally that the scenario should not arise. More specifically, the ATO state at paragraphs 172–3 of Taxation Ruling TR 2010/1:
… This will usually involve an employer or member of the fund. The practice involves making journal entries after the expense is paid that, in the case of the employer or fund member, re-classifies the expense payment as a superannuation contribution and, in the accounts of the superannuation provider, recognises the making of the contribution and payment of the expense.
The Commissioner’s preferred approach is for all superannuation fund expenses to be paid directly out of the fund itself …
ATO’s second position — it’s a contribution
However, let’s assume that nevertheless an SMSF expense is paid on behalf of the SMSF.
The ATO go on to state in that same ruling:
Where a person pays an amount to a third party to satisfy a liability of a superannuation provider, the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf.
Accordingly, if the SMSF journalises the payment as a contribution, then the ATO should accept the treatment as a contribution.
However, journalised contributions are problematic. For example, if a member personally pays an SMSF expense, it is not immediately obvious for whose benefit the ‘contribution’ is made. Remember: if a contribution is made for someone other than the contributor, then the contribution is assessable income for the SMSF. This is regardless of whether the contributor can deduct the contribution. See s 295 160 of the Income Tax Assessment Act 1997 (Cth). There is an exception for spouses under s 295 165. But, if say a family trust pays the expense, then the contribution is included in the SMSF’s assessable income! This is regardless of whether the family trust can claim a deduction for the contribution.
Is it NALI?
Certain amendments occurred to the definition of NALI with effect from 1 July 2018. They relate to where an SMSF incurs expenditure lower than if dealing at arm’s length (including nil).
This means that the starting point is that if a related party pays an SMSF expense, NALI occurs!
However, can NALI be averted if the SMSF treats the expense as a journalised contribution?
Presumably.
Recall the ATO’s taxation ruling on contributions, quoted above. As the ATO say there:
…the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf.
This should prevent NALI arising if the SMSF treats the expense as a journalised contribution. (Of course, this assumes that the SMSF journalises the market value of the expense as a contribution.)
Do the draft rulings change the position?
In this article, we have referred to Taxation Ruling TR 2010/1. The ATO has released two draft consolidations regarding this ruling:
- firstly, TR 2010/1DC, which is available at: <https://www.ato.gov.au/law/view/document?docid=DTC/TR20101DC1/NAT/ATO/00001&PiT=20210728000001>; and
- secondly, TR 2010/1DC2, which is yet to be finalised and available at: <https://www.ato.gov.au/law/view/document?LocID=%22DTC%2FTR20101DC2%2FNAT%2FATO%22&PiT=99991231235958>.
Furthermore, there is a Law Companion Ruling regarding NALI, namely, LCR 2021/2. The ATO has released a draft consolidation regarding this. See LCR 2021/2DC, which is available at <https://www.ato.gov.au/law/view/document?docid=DCC/LCR20212DC1/NAT/ATO/00001>
These draft rulings do not change the position reflected in this article.
Conclusion
If a related party pays an expense on behalf of an SMSF, NALI can be averted. However, this involves careful journal entries. The journal entries should recognise the expense as a market value contribution.
However, journalised contributions and expenses are not ideal. Best practice is for the SMSF to receive contributions directly and pay its expenses directly.
Related articles:
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Bryce Figot, Special Counsel ([email protected] and Daniel Butler, Director ([email protected]) DBA Lawyers Pty Ltd
DBA LAWYERS
3 June 2025
