Scott said to ensure an SMSF is not breaching NALI rules three tests can be applied to avoid tax penalties.

“The first test is in relation to when income in an SMSF is derived via a scheme where both parties are not dealing with each other on arm's length terms and the SMSF is better off due to the transaction,” she said.

“Essentially, they're getting an inflated benefit so they're getting more income into the fund than they would have done had they been dealing with it.”

Scott continued that the second test is where companies receive dividends from an SMSF, such as when a private company might pay a dividend into the SMSF.

“That in itself won't necessarily be a problem unless that dividend is higher than it should be due to either the investment in the fund or they might be diverting income to the SMSF, rather than the other shareholders,” she said.

“In that scenario, if that was the case and all shareholders are treated equally, and the SMSF is getting more than what it put in in terms of share capital and investment, then NALI will apply to the dividends that are received by the SMSF.”

The third test deals with trusts, she said, and generally considers discretionary trusts that have a non-fixed entitlement, or a family trust that makes distributions to an SMSF.

“Anytime a family trust makes a distribution to the SMSF that would be considered NALI. The same would apply for hybrid trusts as well,” she said.

“If you have a fixed trust, if an SMSF holds units in a unit trust, for example, you have to ensure they are receiving no more than should in relation to their investment capital.”

Scott said as an example of how to apply the test, to consider the scenario of Mark Waters who is looking to buy a property and build a duplex and wants his SMSF to be involved in the transaction and profits to flow through to the fund.

“Obviously, you want to have the profits flow through to the SMSF because it's taxed at 15 per cent rather than Mark's marginal tax rate,” Scott said.

“The development is going to be carried out through a unit trust in which Mark will hold 50 per cent of the units and his SMSF owns the other 50 per cent of the trust and will not need to borrow as it has enough capital to fund the property development.”

Scott said the development is not carrying on a business property development. When the properties are completed and sold, the trust has a net profit of $2.5 million that it intends to distribute.

“Mark wants to send $2 million of that to the SMSF and $500,000 to himself. Now in this case, because there is 50/50 ownership, the profit needs to be split between the two trusts, but as that is not happening, then tax has to be paid at the highest marginal rate on the $2 million that's paid into the SMSF,” she said.

“In order to not have this issue, you need to make sure that $1.25 million went to the SMSF and $1.25 million was distributed to Mark as taxable income from the trust perspective.”