Broderick said the first NALI test relates specifically to dealings at an SMSF level, where the dealings are directly with the fund and are on a non-arm’s length basis, and the income is greater than it should be.

“Critically, there [are] some non-arm’s length dealings, but equally critically is that the income is more than it should be, which means [that] if it’s less than it should be, if non-arm’s length dealings are favouring the other party, not the SMSF, there is not NALI problem,” he said.

“There may be a problem under section 109 of the SIS Act, but it is not a NALI problem.”

Broderick said the second test relates to when an SMSF has invested in a company, which could be a pre-1999 company, a regulation 13.22 (c) company, or an unrelated company.

“NALI doesn’t care which one of those companies it is, but what it looks for is whether there’s a dividend or some other income received by the SMSF from a private company and whether it is a dividend or income and if it is a non-arm’s length dealing,” he said.

“The second test is also the only one that has criteria [that] measures whether there [have] been arm’s-length dealings, and there [are] several criteria listed, including the value of shares.”

The third test relates to whether a distribution has been received where there is no fixed income.

“Typically, that will be a discretionary trust, but also it could be some sort of hybrid trust. And if we have that, it’s automatically NALI; there is nothing more to test. Whether it’s $1 or $1 million dollars, it automatically attracts NALI,” he said.

He continued that the last test concerns fixed trusts where there is a fixed entitlement to income and is very similar to the SMSF test except from the perspective of a trust.

“Again, this test looks to see whether the parties are dealing with each other at arm’s length and whether the income is more than it should be. If that is the case, it will trigger NALI, but if it is less than it should be, then it is not,” he said.

Broderick said the consequences of triggering NALI mean a fund can be taxed at 45 per cent compared to normal rates that include 15 per cent in accumulation phase, 15 per cent on income, 10 per cent on capital gains, or zero for pension phase.