In certain circumstances, a complying superannuation fund's (which includes SMSFs) income will be taxed at the highest marginal rate and not the concessional rate that normally applies to the fund's income. A complying superannuation fund's (fund) income that is taxed at the highest marginal rate is referred to as:
Both the old legislation and the new legislation provide that dividends paid from a private company to a fund will be taxed as 'special income' or 'non arm's-length income' at a rate of 45% — unless the Commissioner of Taxation decides otherwise.
The recent case of Darrelen Pty Ltd v Commissioner of Taxation analysed when the Commissioner should exercise his discretion to decide otherwise.Nicole Siemensma
In October 1995, the trustee of a complying superannuation fund (Fund), purchased 4 of the 100 shares on issue in Vercot Pty Limited (Vercot). Vercot was a passive holding company that held shares in Abigroup Limited (Abigroup), a listed public company. Other relevant facts are:
The Commissioner had to decide whether any of the dividends Vercot paid to the Fund should be treated as special income and taxed at the higher rate. 
The Commissioner decided to treat the dividends paid to the Fund as 'special income' and so they were taxed at the higher rate.
The Commissioner did not decide whether the Fund's acquisition of the shares from a related party breached the Superannuation Industry (Supervision) Act 1993 (SIS Act). However, as explained below, the circumstances of that transaction were relevant to the Commissioner's decision about taxation treatment of later dividends.
The Federal Court considered whether:
The law requires the Commissioner to consider the following when exercising his discretion:
(Those factors under the old law for 'special income' are now in force — and exactly the same — under the new law for 'non arm's-length income'.)
The Court found that the Commissioner was entitled to not exercise his discretion and to treat the income as 'special income' and tax it at 45%.
In coming to that view, the Court felt it was highly relevant that the Fund acquired the shares for less than market value. The Court highlighted that the investment was not made on 'arm's length terms' and held that the investment enabled the Fund to derive a greater level of income than had the Fund paid market value for the shares.
Although the decision only focused on private company dividends, the Court gives us a clear message that if a fund transacts with a related party, then the transaction has to be effected on 'arm's length terms'.
If the transaction is not effected on 'arm's length terms' and the return generated by the fund is above market value, then it is likely that the income will be regarded as 'special income' and not taxed concessionally.
In short, all transactions with related parties should:
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Tax and Revenue Team.
You can access various ClearLaw articles for more relevant information relating to superannuation and taxation issues:
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 Regulated by Division 273 of the Income Tax Assessment Act 1936 (ITAA 1936).
 And is regulated by Subdivision 295-H of the Income Tax Assessment Act 1997 (ITAA 1997).
 2010 FCAFC 35.
 And be regulated by Subdivision 295-H of the ITAA 1997.
 Section 273(2) of the ITAA 1936
 Section 295-550(3).
Daniel is a lawyer in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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