In short

Under SMSF NALE rules, under-charging the fund for related-party services (like free accounting or legal work) can trigger tax at 45% instead of the fund's normal rate. Since 2024 reforms, general expense breaches are capped at twice the underpaid amount, but specific expense breaches tied to a particular asset can still taint all of that asset's income, with no cap.

For Australian Self-Managed Super Fund (SMSF) trustees — particularly those approaching or in the retirement phase — the non-arm's length income (NALI) rules under section 295-550 of the Income Tax Assessment Act 1997 are among the most consequential compliance provisions in superannuation law. Income that arises from a non-arm's length dealing is taxed at the top marginal rate of 45% (super funds don't pay the 2% Medicare levy, so 45% rather than 47%), overriding the concessional 15% accumulation rate and even the 0% retirement-phase exemption that applies to assets supporting an account-based pension. Beginning in 2018-19, the ATO took the position that NALI could be triggered not only by income-side breaches (for example, buying assets at below-market value from related parties) but also by non-arm's length expenses (NALE) — under-charging the SMSF for services or assets, where the SMSF benefits from a related party's professional skills without paying market rates. The pre-2024 ATO position was severe: even a modest NALE breach on a general expense (such as accounting or legal services) could potentially taint all of the SMSF's income at top marginal rates. The 2024 reforms substantially limited this consequence, but NALE remains a significant compliance area for SMSFs — and especially for retirement-phase funds where pension earnings would otherwise be tax-free.

The NALI framework exists to prevent SMSFs from receiving unduly favourable terms from related parties. The classic case is an SMSF buying shares in a private company at below-market value, then enjoying the concessional super tax environment on the resulting capital gain. The NALI rules tax that gain at top marginal rates, neutralising the tax advantage that would otherwise flow from the off-market dealing. From 2018-19, the ATO extended this concept to expense-side breaches: if a member or related party provides services to the SMSF for less than arm's length value, the resulting "saving" amounts to a non-arm's length advantage, and the connected income should be tainted as NALI. The position was articulated in ATO Law Companion Ruling LCR 2021/2 and immediately created widespread alarm in the SMSF sector — particularly where the alleged breach related to a general expense like accounting fees, where the ATO took the position that NALE could taint the fund's entire income.

The 2024 reforms addressed this by imposing a cap on the NALI consequences of general expense NALE. The Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, with the NALE measure applying from the 2018-19 income year, limits the maximum amount of NALI that can arise from a general expense NALE breach to twice the value of the breach — twice the difference between the arm's length expense and the actual expense charged. If an accountant member should have charged the SMSF $4,000 for tax return preparation but charged nothing, the breach is $4,000, and the NALI subject to the 45% rate is capped at $8,000 (2 × $4,000) — not the SMSF's entire income. This is a substantial improvement on the pre-2024 position. The amendments also reflect the ATO's confirmed position that trustee work performed in a trustee capacity — signing trustee documents, approving investment decisions, attending trustee meetings — does not trigger NALE, addressing the major concern that ordinary trustee participation would automatically create NALE risk. (Large APRA-regulated funds were exempted from the general-expense NALE rules entirely; the 2× cap is the relevant relief for SMSFs and small APRA funds.)

The specific vs general expense distinction remains critical. A specific expense is one tied to a particular asset or income source — for example, property management fees on a specific rental property, legal fees on a specific share purchase, maintenance costs on a specific business real property holding. A general expense is a fund-wide overhead — for example, accounting fees for the annual return, audit fees, ASIC fees, general administration. The 2024 cap applies to general expense NALE, which is now limited to 2× the breach amount. Specific expense NALE retains the broader consequence — the income from the asset or activity to which the specific expense is connected can be tainted as NALI, with no equivalent cap. The practical implication: a member who provides free legal services on a specific property purchase creates specific expense NALE and risks all the income from that property being tainted; a member who provides free accounting services for the fund's annual return creates general expense NALE capped at 2× the breach.

The pension phase amplification makes NALE especially dangerous for retirement-phase SMSFs. Earnings on assets supporting an account-based pension are normally exempt from tax under the exempt current pension income provisions (the segregated current pension assets exemption in section 295-385 of the ITAA 1997, and the proportionate method). NALI overrides this exemption. A retirement-phase SMSF that would normally pay zero tax on a $100,000 capital gain pays $45,000 in tax (45% top marginal rate) if that gain is tainted as NALI. For SMSFs with high asset balances and substantial latent gains — common in retirement phase — even a relatively small NALE breach on a specific asset can have a disproportionately large tax cost. The very structure that retirement-phase trustees most want to preserve (the tax-free pension earnings environment) is the structure most exposed to NALE damage.

The trustee capacity exclusion is the cleanest planning response for SMSFs where members have professional skills relevant to fund operation. A member who is also a trustee can perform trustee duties without charging the SMSF — signing documents, approving investments, attending trustee meetings — and these activities are not NALE-triggering even though they involve work the trustee performs. The line between trustee-capacity work and professional-capacity work is fuzzy in practice. A solicitor who is a trustee and signs trustee resolutions is acting in a trustee capacity. The same solicitor who provides drafted legal advice on a specific property purchase, using the equipment and resources of their legal practice, is acting in a professional capacity — and either needs to charge an arm's length fee or accept the NALE risk. Documentation of which capacity is being engaged matters: written trustee minutes for trustee work, separate engagement letters for professional services with arm's length fees.

What do worked planning examples show?

These two cases show how NALE applies in retirement-phase SMSFs. Illustrative only — not personal advice.

Case 1 — Tom and Sarah, both 64. SMSF with $1.4M in assets, transitioning to pension phase. Tom is a chartered accountant whose firm prepares the SMSF's annual tax return and financial statements without charging — Tom views it as his contribution to running the fund. The arm's length value of the work is approximately $3,500 a year. On these facts, this is general expense NALE — Tom's accounting services are general fund administration, provided through his practice rather than in a pure trustee capacity. Pre-2024, the ATO position would have been that all the SMSF's income could be tainted as NALI. Under the 2024 amendments, the NALI is capped at 2 × $3,500 = $7,000 of tainted income per year — taxed at 45% = $3,150 in NALI tax. Strategy: either Tom's firm starts charging the $3,500 arm's length fee per year (eliminating the breach entirely), or the trustees accept the capped NALI cost as the price of the free services. The 2024 amendments have made the analysis manageable; pre-2024, this would have been catastrophic.

Case 2 — Margaret, 68, sole member SMSF in pension phase with $2.2M in assets including a $900,000 commercial property purchased through the SMSF. Margaret's son is a solicitor and provided all legal services on the property purchase three years ago without charging — work valued at approximately $6,000 at arm's length, performed through his legal practice. On these facts, this is specific expense NALE — the legal services were tied to the specific property purchase. The 2024 amendments do not cap specific expense NALE consequences. The ATO position is that the property's income (rent and capital gains) can be tainted as NALI from the date of the breach. If Margaret eventually sells the property, the $300,000-plus capital gain could be assessed at the 45% top marginal rate (around $135,000 in tax) rather than enjoying the 0% retirement-phase exemption. Strategy: this is a much harder situation. Voluntary disclosure to the ATO with a remediation proposal (for example paying the arm's length legal fee, with appropriate documentation) may be the path forward, but the tainting from past years is difficult to unwind. Specialist SMSF tax advice is essential; this is not a self-managed compliance issue.

For SMSF trustees in or approaching retirement phase, NALE remains a meaningful compliance risk despite the relief provided by the 2024 amendments. The advice work is to inventory potential NALE exposures (members providing services, related parties charging below-market), distinguish specific from general expense breaches, restructure as trustee-capacity work where genuinely available, document arm's length pricing where professional services are provided, and engage SMSF auditors on the analysis annually. The 2024 amendments have made the consequences of general expense NALE proportionate (capped at 2× the breach) — but specific expense NALE remains capable of tainting substantial income, and the pension phase environment magnifies the cost of any breach. Active management is essential; passive hope that historic informal arrangements won't be scrutinised is not.

Sources

Key takeaways

  • NALI is taxed at the top marginal rate of 45%, overriding both the concessional 15% accumulation rate and the 0% retirement-phase pension exemption.
  • Since 2024 reforms, general expense NALE (fund-wide overheads like accounting or audit fees) is capped at twice the value of the underpaid amount, not the fund's entire income.
  • Specific expense NALE — tied to a particular asset, like free legal work on one property purchase — has no cap and can taint all income from that asset.
  • Trustee-capacity work, like signing documents or approving investments, doesn't trigger NALE even when performed by a member with relevant professional skills.
  • Retirement-phase SMSFs are especially exposed because NALI overrides the tax-free pension earnings exemption that would otherwise apply.

Frequently asked questions

What happens if a member does free accounting or legal work for their SMSF?

It depends whether the work is a general fund-wide expense or tied to a specific asset. Free general services, like preparing the annual accounts, create general expense NALE, now capped since 2024 at twice the value of the underpaid amount. Free services tied to a specific asset, like legal work on one property purchase, create specific expense NALE with no cap, risking that asset's entire income being taxed at 45%.

Does signing documents as an SMSF trustee create NALE risk?

No. Genuine trustee-capacity work — signing trustee documents, approving investment decisions, attending trustee meetings — doesn't trigger NALE, even if the member also happens to have relevant professional skills. The risk arises when a member provides professional services (like drafted legal advice) using their practice's resources rather than acting purely as trustee.

Why is NALE particularly risky for an SMSF already in pension phase?

Because NALI overrides the exempt current pension income provisions that would normally make pension-phase earnings tax-free. A retirement-phase SMSF that would otherwise pay zero tax on a large capital gain can instead face 45% tax on that gain if it's tainted as NALI, making even a small NALE breach on a specific asset very costly.

How much has the 2024 NALE reform actually changed for SMSFs?

It substantially limited the risk for general expense breaches — capping the taxable NALI at twice the underpaid amount rather than potentially tainting the fund's entire income, which was the harsh pre-2024 ATO position. It didn't change the treatment of specific expense NALE, which can still taint all income connected to the relevant asset with no equivalent cap.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.