SMSF NALI and NALE: how the 45% tax trap works (2026–27)

Non-arm's length income (NALI) is one of the harshest outcomes in the Australian super system. Income classified as NALI is taxed at 45% inside the SMSF — not the usual 15% accumulation rate or 0% retirement-phase rate. The rules sit in section 295-550 of the Income Tax Assessment Act 1997 and were extended in 2018 to capture non-arm's length expenses (NALE). Trustees who run businesses, own property or transact with related parties need to understand the rules before signing anything.

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01What the arm's length principle means

An arm's length dealing is one where both parties act independently and the terms reflect what unrelated commercial parties would agree. When an SMSF deals with a related party — a member, relative, related trust or related company — every term must mirror what a stranger would have negotiated. Rent, interest rates, sale prices, service fees and labour rates all need to be benchmarked and documented.

02What income gets caught

• Rent received from a related party above market rates on a business real property lease.
• Distributions from a related trust where the fund's entitlement is disproportionate to its capital contribution.
• Dividends from a private company where the shareholding terms are not commercial.
• Interest on a loan to a related party above market rates.
• Capital gains on disposal of an asset that was acquired on non-arm's length terms.

03NALE — the expenses limb

NALE extends NALI to situations where the fund incurs an expense lower than an arm's length party would have charged — including a nil expense. The classic trap: a member who is a licensed real estate agent manages the fund's rental property for free. On the ATO's view in LCR 2021/2, the rental income from that property can be taxed as NALI. The same risk applies to a member-accountant preparing the fund's financials personally rather than through their firm.

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04The trustee-capacity exception

Work performed in a genuine trustee capacity — making investment decisions, signing minutes, operating the fund's bank account — is not an expense of the fund and does not trigger NALE. The line is crossed when a member uses professional skill, equipment or licences that they would ordinarily charge for. If the service would normally be invoiced by your business, invoice the fund at your standard rate.

05Common traps to avoid

• Buying a related-party property without a current independent market valuation.
• Charging below-market rent to a member's business occupying fund premises, then quietly raising it later.
• A member-tradesperson renovating a fund property without invoicing through their business.
• Related-party loans below the safe-harbour interest rate published annually in PCG 2016/5.
• Free or discounted accounting, audit or legal work provided to the fund by a member's firm.

06How to stay safe

Document everything. For property, obtain a written market rent appraisal from an independent agent at the start of each lease and refresh it on renewal. For services from a member's business, invoice at the firm's standard rate and pay it from the fund's account. For related-party loans, follow the PCG 2016/5 safe harbour precisely. Record in trustee minutes why each rate is considered commercial — auditors test this evidence every year, and reconstructing it after 30 June carries far less weight.