“When you're looking at s25.5 there's no requirement that there's a nexus to assessable income. You just get a deduction because of this specific section of the Tax Act. But what exactly does tax affairs mean?”

Scott said under s995-1 of the Income Tax Assessment Act, it applies to any tax affairs, but from a practical point of view, an individual would mostly be looking at the tax return preparation and dealing with the Tax Office for any particular areas that apply.

“You would be looking at probably (a) and (b) of S25.5 in relation to claiming deductions under that section,” she said.

“If we then think about non-arm's length expenses and non-arm's length income, we usually have three buckets that we refer to. The first bucket is the non-arm's length income rules, and a common example would be an SMSF that has business real property leased to a related business, and the income is higher than it should be, so it's higher than market rates.”

The SMSF is getting more money than it should, so it's in a better position and, in that scenario, non-arm's length income would apply to the net income of that property.

“The next bucket is the relatively new one in relation to non-arm's length expenses, and is where it is a specific expense or where this expense relates to a specific asset of the fund,” Scott said.

“If we go back to our commercial premises, we might have a related party completing work on that commercial premises, and they haven't charged a fee for any services that they've provided. Those services were provided in their individual capacity, which is one of the key requirements and which means in that scenario, the plumber, for example, has done the work to the commercial property, and there is a specific asset that the expense relates to and the non-arm's length expense rules will apply to that.”

There are then the non-arm's length expenses of a general nature where the expenditure does not apply to a specific asset and on which a deduction can be claimed.

“That would be an administration-type expenses of the fund. When we're looking at the first two buckets, it's the net income from the asset that we apply non-arm's length income rules to, whereas when we're looking at the third bucket, that's the two-factor approach that we look at,” Scott said.

“That's working out what the expense should have been and multiplying that by two and then that would generally be what the non-arm's length expense rules were, assuming of course, that the taxable income of the SMSF is more than that amount that we've worked out.”