Nobody sets out to pay 45% tax inside their super fund. It happens because a family does what families do. A plumber fixes the bathroom in the fund's rental property on a Saturday. A member lends the fund money at no interest to help it buy a property. The family accountant does the fund's tax return as a favour. Each is generous. Each can turn some or all of the fund's income into non-arm's length income, taxed at the top rate.
This guide explains what NALI and NALE are, how the ATO applies them under Law Companion Ruling LCR 2021/2, how the 2024 amendments changed the general expense rule, and how to keep your fund clear of them. It's general information. Decisions about how your fund invests are for a licensed financial adviser; we do the tax, accounting and compliance work.
What is non-arm's length income (NALI)?
Section 295-550 of the Income Tax Assessment Act 1997 sets out the rules. NALI is a component of a super fund's income that is taxed at the highest marginal rate (45% for 2026–27) instead of the fund's normal 15%, or the 0% on income supporting retirement-phase pensions. Capital gains are included.
Income of an SMSF is NALI in these main situations:
| Situation | What makes it NALI |
|---|---|
| Income is more than an arm's length amount | The fund gets more income than it would from an arm's length dealing, such as rent above market from a related tenant |
| Expenditure is less than an arm's length amount (NALE) | The fund pays less than market for something used to earn its income, or pays nothing at all |
| Dividends from a private company | Treated as NALI unless the amount is consistent with an arm's length dealing |
| Distributions from a trust where the fund doesn't have a fixed entitlement | The whole distribution is NALI. A fund shouldn't hold interests in a discretionary trust |
| Distributions from a fixed trust | NALI if the fund's entitlement was acquired, or the income derived, under a non-arm's length dealing |
The parties don't have to be related. NALI can arise between strangers who don't deal at arm's length. In practice, though, it almost always comes from members, relatives and their businesses.
What is non-arm's length expenditure (NALE)?
NALE is the second row of that table, and it's where most SMSFs get caught. Since the 2018–19 income year, income is NALI if, in gaining or producing it, the fund:
- incurs an expense that is less than it would have been at arm's length, or
- doesn't incur an expense it would have incurred at arm's length (for example, free services).
The ATO's view, in LCR 2021/2, includes:
- Capital expenditure counts. A discount on improvements to a property, or on buying an asset, can be NALE.
- Interest is an expense. A related-party loan at a nil or low rate creates NALE. The ATO's earlier view in TD 2016/16 reached the same result for interest-free related-party LRBAs.
- The link can be to all the fund's income. A general expense, like accounting or audit, relates to all of the fund's income. That's why the 2024 amendments were needed (see below).
What's the difference between general and specific expenses?
This distinction decides how much income is caught.
| General expense | Specific expense | |
|---|---|---|
| What it is | Relates to the fund as a whole, not a particular asset | Relates to a particular asset or investment |
| Examples | Accounting, tax return, audit, actuarial certificate, investment advice, administration | Repairs, renovations or management of a fund property; interest on a loan to buy a particular asset; brokerage on a particular trade |
| How much income is NALI (SMSFs and small APRA funds, from 2018–19) | Twice the difference between the arm's length amount and the amount actually charged | All the income from that asset, including any capital gain on its sale |
| Is there a ceiling? | Yes, the formula limits the NALI amount | No. The whole income stream from the asset is caught |
The "twice the difference" rule for general expenses came from amendments passed in 2024, applying back to the 2018–19 income year. Before that, the ATO's position was that a general NALE could taint all of the fund's income. Specific expenses were not changed by the amendments.
Worked examples: what NALE costs
All examples are hypothetical, with round numbers. Each fund is in accumulation phase unless stated.
Example 1: free accounting from the family firm (general expense)
A member's accounting firm prepares the fund's financial statements and tax return. An arm's length fee would be $4,000. The firm charges nothing.
| Amount | |
|---|---|
| Arm's length fee | $4,000 |
| Amount charged | $0 |
| Difference | $4,000 |
| NALI amount (twice the difference) | $8,000 |
| Tax on $8,000 at 45% | $3,600 |
| Tax the fund would have paid on that income at 15% | $1,200 |
| Extra tax | $2,400 |
The "saving" of $4,000 costs $2,400 in extra tax, and the auditor will need to deal with it. Charging the fee would have been cheaper and cleaner.
Example 2: the tradie trustee renovates the fund's rental (specific expense)
A member who runs a plumbing business uses an apprentice and the business van to renovate the bathroom in the fund's rental property. The market price is $25,000. The fund pays nothing. The property earns $40,000 net rent a year, and is later sold for a $400,000 capital gain.
| At 15% (arm's length) | As NALI at 45% | |
|---|---|---|
| Tax on a year's net rent of $40,000 | $6,000 | $18,000 |
| Tax on a $400,000 capital gain (after the one-third discount) | $40,000 | $120,000 |
The extra tax on the rent is $12,000 every year the ATO treats the income as tainted, and on the gain $80,000. The $25,000 "saving" is one of the most expensive favours in the tax system. Because this is a specific expense, there's no twice-the-difference cap.
Example 3: the interest-free family loan (specific expense)
A member lends the fund $500,000 at 0% interest under an LRBA to help buy business premises. Without arm's length interest, the rent and the eventual capital gain from the premises are at risk of being NALI. The ATO's safe harbour rate for related-party real property LRBAs for 2026–27 is 9.35%, and its other terms (term, loan-to-value ratio, monthly repayments, written agreement) must also be met. Our SMSF borrowing guide sets out the safe harbour terms.
Example 4: pension phase makes it worse
Take Example 2, but the fund is fully in retirement phase. At arm's length, the rent and gain would be tax-free. As NALI, they're taxed at 45%. The fund goes from paying nothing to paying the top rate.
What about work I do as a trustee?
Trustees of an SMSF generally can't be paid for their trustee duties. So doing trustee work yourself, unpaid, is normal and isn't NALE. The ATO's view in LCR 2021/2 draws the line by capacity:
| Situation | NALE risk |
|---|---|
| You do the fund's bookkeeping, decide its investments, sign documents and deal with the auditor, as trustee | Generally no |
| You do minor upkeep on the fund's property as trustee, using no business resources | Generally no, but keep it minor |
| Your business (its staff, equipment, trade licence or professional practice) provides a service to the fund at a discount or for free | Yes, unless charged at arm's length |
| A related party is engaged to provide a service in their professional capacity at a "family rate" | Yes |
| A related business gives the fund a discount it publishes and offers to all unrelated customers | Generally no |
The question is facts, not labels. Calling a job "trustee work" doesn't help if it was done by your business. If in doubt, charge an arm's length price, put it in writing and pay it from the fund's bank account.
Where does NALI show up beyond expenses?
Rent from a related tenant
If your business leases business real property from your fund, rent above market is NALI (the excess makes the income more than an arm's length amount). Rent below market is also a problem: it gives a benefit to a related party and breaches the arm's length rules in the SIS Act. Keep an independent rent valuation on file and review it regularly.
Private company dividends and 13.22C companies
A dividend from a private company to an SMSF is NALI unless the amount is consistent with an arm's length dealing. That matters for any fund holding shares in a family company, including a non-geared 13.22C company. It's one reason most property co-investment is done through a 13.22C unit trust instead. See our 13.22C unit trust guide.
Unit issues and transfers at the wrong price
If a related unit trust issues units to the fund below market value, or the fund buys units from a related party at an old price, value moves between parties and the fund's income from those units can be NALI.
How do I keep my SMSF clear of NALI and NALE?
A checklist we use with clients:
- List every related party who provides anything to the fund: services, loans, premises, equipment, labour. Our guide to related parties explains who counts.
- Price each one at market. Use quotes, rate cards, independent valuations or the ATO's safe harbour terms.
- Put it in writing before the work or loan starts.
- Pay from the fund's own bank account, on time.
- Don't let a related business absorb fund costs, such as paying the fund's insurance or council rates.
- Re-check each year, especially rent reviews and loan interest rates.
- For property works by related builders or trades, get an independent quote and pay it in full.
Mistakes we see with NALI and NALE
- Free or discounted professional services from a member's own firm: accounting, legal, financial planning, property management.
- Family trades working on fund property at cost price or on weekends "for nothing".
- Related-party loans with no interest, a token rate, or repayments that stop when money is tight.
- Safe harbour rates not updated for the new financial year.
- Related-party rent never reviewed, so it drifts above or below market.
- A related business paying fund bills, like council rates or insurance, without being repaid.
- Units in a family unit trust issued at the original $1 price years after the property has gone up in value.
- The fund holding units in a family discretionary trust, so every distribution is NALI.
- Assuming pension phase makes it irrelevant. NALI is taxed at 45% regardless.
- Fixing it after the audit query arrives. By then the income year has closed.
Most of these are easy to prevent and hard to undo. That's why we look at related-party dealings during the year, not only when the accounts are prepared.
How BPAG helps
We prepare the fund's financial statements and annual return, coordinate the independent audit with an approved SMSF auditor, and review related-party dealings each year as part of our compliance monitoring.
- NALE review. Our super and SMSF agent works through each related-party arrangement and flags the ones that are general or specific expenses and the likely NALI exposure; your accountant checks the analysis and explains it in plain English.
- Rent and loans. Our CPI rent review agent runs the annual rent review on related-party leases, and loan interest is checked against the safe harbour rate for each year; your accountant reviews both.
- Evidence for the auditor. We help you assemble the quotes, valuations and agreements that show arm's length terms.
The agents draft. Qualified accountants review and sign off, and nothing goes to you, the auditor or the ATO without a person approving it. Loan agreements and leases are prepared by a solicitor, and recommendations on your fund's investments come from a licensed financial adviser.
What to send us
- A list of any services, labour, loans, leases or equipment provided to the fund by members, relatives or their businesses
- What was charged, and when it was paid
- Quotes, invoices, rate cards or valuations that support the price
- Loan agreements and leases
- The fund's latest financial statements
See our SMSF accounting and audit service for how we look after funds year round, or start at the SMSF guide.
Frequently asked questions
Does NALI apply in pension phase?
Yes. Non-arm's length income is taxed at 45% even if the fund is fully in retirement phase. The exemption for income supporting retirement-phase pensions doesn't cover it, so a fund that expects to pay 0% tax can be hit hardest.
I'm an accountant and a trustee of my own SMSF. Can I do the fund's accounts for free?
It depends on the capacity in which you do the work. Work done purely as trustee, without your firm's staff, systems or professional services, is generally not NALE. If your firm prepares the accounts as part of its business, it should charge an arm's length fee; otherwise the fund has a general NALE amount, taxed at 45% on twice the discount.
Can a related party give my SMSF a discount that's available to everyone?
Generally yes. A discount offered on the same terms to unrelated customers, such as a published bulk or loyalty discount, is consistent with an arm's length dealing. What creates NALE is a discount the fund gets because of the relationship.
Can I fix NALE by paying the shortfall later?
Not reliably. The test is applied to what actually happened in the income year. Paying an arm's length amount afterwards doesn't undo the year in which the expense was incurred at a discount, and for a specific asset the ATO's view is the taint can continue. The fix is prevention: agree and pay market rates before work starts.
Are expenses from before 1 July 2018 caught?
They can be. The NALE rules apply to income derived from the 2018–19 income year onwards, even where the arrangement behind it was entered into before 1 July 2018. So an old discounted improvement to a fund property can still affect income the fund earns today. If your fund has older related-party work on its assets, have it reviewed.
Does NALI affect large industry and retail funds the same way?
No. Large APRA-regulated funds have different treatment under the 2024 amendments. The twice-the-difference rule for general expenses applies to SMSFs and small APRA funds, which is why NALE is mainly an SMSF issue.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.