Most serious SMSF tax accidents are not caused by aggressive planning.
They are caused by a trustee doing something that felt like good management — charging the fund nothing for work they did themselves, having a related firm bill the fund below its usual rate, or buying an asset from a related entity at a price that seemed reasonable.
The non-arm's length provisions turn those into income taxed at 45%.
That is the top marginal rate, applied to income that would otherwise have been taxed at fifteen percent, or at nothing in retirement phase.
What triggers it
There are two related concepts. NALI is non-arm's length income. NALE is non-arm's length expenditure, which contaminates income downstream.
Three pathways account for nearly everything.
Income received above market. This is the limb people get backwards. The income branch catches income that is more than an arm's length arrangement would have produced — a related party paying the fund an inflated rent or an above-market return. Charging a relative less than market rent makes the fund worse off, so it is not caught here at all. That is a different problem, and a serious one: leasing fund property to a related party below market is a breach of the arm's length dealing requirement in section 109 of the SIS Act, and puts the sole purpose test in question. It is a compliance failure rather than a 45% tax event.
The test in either direction is not simply the amount — it is whether the terms of the arrangement differ from what would be expected between unrelated parties. A related party arrangement that genuinely replicates commercial terms, with the same rate, security and conditions, is not NALI even though the counterparty is related.
Expenses paid below market. The other side, and the one that catches most people. If a member provides services to the fund at a discount or for free, or a related-party firm charges the fund below-market fees, the shortfall is NALE. Note the direction: income is caught when it is too high, expenses when they are too low. Both leave the fund better off than an arm's length dealing would have, which is what the provisions are aimed at.
Acquisition below market. The most insidious. An asset bought from a related party for $400,000 when it was worth $600,000 was acquired on non-arm's length terms — and that contaminates the future income the asset produces, including the eventual capital gain.
The 2024 change that most articles have not caught
This is where a lot of what you will read online is now out of date, including a great deal that was written in good faith.
Before the amendments, a below-market general expense could contaminate a fund's entire income. That was the position that alarmed everybody, and it is no longer the law.
The Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 draws a distinction that now does most of the work.
General expenses — accounting fees, audit fees, administration — are capped. The NALI arising is limited to twice the difference between the arm's length expense and what was actually paid.
An example makes it concrete. A fund pays $1,000 for services that would ordinarily cost $2,500. The shortfall is $1,500. The NALI is twice that — $3,000 — taxed at 45%, so roughly $1,350. Unpleasant, and a long way from the whole fund's income.
Where no expense was incurred at all but one should have been, the NALI is twice the expected arm's length cost.
Specific expenses — those tied to a particular asset, such as maintenance on a fund-owned property or advice on a specific holding — are not capped. All income derived from the arrangement involving that expense becomes NALI, including dividends and capital gains on the asset.
So the shape of the risk has changed. Sloppiness on general fund administration is now a bounded problem. Sloppiness on anything attached to a specific asset remains a catastrophic one.
The trustee services question
This is the one trustees ask about most, and the distinction is narrower than people expect.
Performing your trustee duties — making investment decisions, signing minutes, running the fund — does not trigger NALE. You cannot be paid for those duties anyway.
Performing professional services in a non-trustee capacity does. If you are an accountant and you prepare your own fund's financial statements using your firm's resources and staff, you are providing a professional service. Doing it for free, or at mates' rates, is non-arm's length expenditure, and the fund needs to be charged the market fee.
The line is not what you did. It is the capacity in which you did it, and whether a business's resources were used to do it.
Why remediation does not work
The 2019 amendments made one thing permanent, and it is the reason this matters more than most compliance risks.
Before 2019, a contaminated transaction could often be fixed by restructuring it. After 2019, a contaminated asset stays contaminated for as long as the fund holds it — regardless of what is corrected afterwards.
You cannot pay the rent shortfall later and clear the record. You cannot revalue the acquisition and start again. The asset carries it, through every year of income and through the eventual capital gain.
This is why the documentation has to exist before the arrangement, not after. A market rent appraisal obtained before the lease was signed is evidence. A comparison assembled two years later, once the auditor has asked a question, is an argument — and a considerably weaker one.
What protects a fund
Get the evidence first. A written valuation or market appraisal, dated before the transaction, kept on file. For a related party lease that means a rental appraisal; for a related party loan it means terms benchmarked against what a commercial lender would have offered.
Charge the fund properly. If you do professional work for your own fund, invoice it at your normal rate. Paying the fund's own money to yourself feels counterproductive; it is materially cheaper than the alternative.
Treat anything asset-specific with extra seriousness. The cap protects general administration. It does not protect a discounted repair on the fund's property, or below-market advice on a particular holding.
Ask before, not after. In nearly every expensive case, a qualified adviser asked in advance would have identified the problem. In some the adviser did identify it and was overruled. In others nobody asked.
The rules are not there to catch clever people. They mostly catch generous ones — trustees who gave the fund a discount, or gave a relative a break, and did not know that the tax law reads a kindness between related parties as a transfer of value.
Rules stated here are current as at August 2026. The ATO sets out its view in LCR 2021/2 (non-arm's length expenditure) and in its non-arm's length income guidance. Confirm the position before acting.
Adapted from The Self-Managed Super Fund Handbook by Paul Yang. See the books.