NALI and NALE Rules for SMSFs in Australia 2026: An Accountant's Guide

For self-managed superannuation fund (SMSF) trustees who are also professionals — accountants, lawyers, tradespeople, or financial advisers — the temptation to use their own skills to service their fund at reduced or no cost can be significant. However, Australia's non-arm's length income (NALI) and non-arm's length expenditure (NALE) rules impose a punishing 45% tax rate on income derived from transactions that do not reflect genuine market pricing. Understanding these rules, and working with a qualified accountant, is essential for any SMSF trustee who provides services to their own fund.

Understanding NALI and NALE

The NALI rules are contained in section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997). They are designed to prevent SMSF trustees from using related-party transactions to artificially inflate fund income or reduce fund expenses, thereby circumventing the standard 15% superannuation tax rate.

Non-arm's length income (NALI) arises when an SMSF derives income from a transaction where the parties are not dealing at arm's length and the income is higher than would be expected in an arm's length dealing. The classic example is an SMSF that receives rent from a related party at above-market rates.

Non-arm's length expenditure (NALE) arises when an SMSF incurs expenses that are lower than what would be charged on the open market — for example, where a trustee who is a qualified accountant prepares the fund's financial statements and tax return for free, or where a builder-trustee performs renovation work on a fund property at below-market rates. Under the NALE rules, income associated with the under-priced expense is tainted and treated as NALI, taxed at 45%.

The 45% Tax Rate

When income is classified as NALI, it is taxed at the highest marginal tax rate of 45% — three times the standard 15% superannuation tax rate. This rate applies regardless of whether the fund is in accumulation or pension phase, and regardless of the member's age. The financial impact can be severe, particularly for funds with significant investment income or capital gains.

Key Considerations for SMSF Trustees

The NALI and NALE rules are complex, and their application depends on the specific facts of each situation. The following considerations are particularly important for SMSF trustees to understand.

• Trustee capacity vs. individual professional capacity — The ATO distinguishes between work performed in a trustee capacity (which is not remunerated and does not trigger NALE) and work performed in an individual professional capacity (which may create NALE risk if not charged at arm's length rates). A trustee who makes investment decisions for the fund is acting in their trustee capacity. A trustee who prepares the fund's financial statements using their professional accounting skills is acting in their individual capacity.
• Specific asset expenses vs. general expenses — The ATO distinguishes between expenses related to a specific asset and general fund expenses. NALE on a specific asset expense permanently taints all future income from that asset as NALI. NALE on a general expense (such as annual accounting fees) affects only the income of the year in which the NALE occurred, under the ATO's current policy approach.
• Minor and infrequent use of equipment — The ATO has clarified that minor, infrequent, or irregular use of professional equipment (such as using an office computer for personal SMSF administration) does not necessarily indicate that the trustee is acting in their individual professional capacity. However, trustees should document their reasoning carefully.
• The proposed five-times cap — Following industry feedback about the potential overreach of the NALE rules, Treasury has consulted on a factor-based approach that would cap the amount of income taxable as NALI at five times the value of the general expense breach. This proposal has not yet been legislated, and trustees should not rely on it until it becomes law.
• Related-party transactions — Any transaction between the SMSF and a related party — including the trustee, their associates, or related companies — must be conducted on arm's length terms. This includes the purchase and sale of assets, the provision of services, and the payment of rent.

Common Mistakes and Red Flags

The NALI and NALE rules catch many SMSF trustees off guard, particularly those who are professionals and assume that providing services to their own fund is a legitimate way to reduce costs. The following mistakes are frequently identified by accountants and ATO auditors.

• Providing professional services to the fund for free — A trustee who is a qualified accountant, lawyer, or financial adviser and provides services to their fund without charge is creating NALE. Even if the intention is simply to save the fund money, the tax consequences can be severe.
• Charging below-market rates for services — Charging the fund a reduced rate for professional services — even a modest discount — can trigger NALE if the rate is not consistent with what would be charged to an unrelated client.
• Performing trade work on fund property — A trustee who is a licensed builder, electrician, or plumber and performs maintenance or renovation work on a fund property at below-market rates is creating NALE on a specific asset, which permanently taints all future income from that property.
• Failing to document arm's length pricing — Even where a trustee believes they are charging arm's length rates, failing to document the basis for the pricing can create difficulties in an ATO audit. Contemporaneous documentation of market rates is essential.
• Overlooking the impact on pension phase income — Many trustees assume that pension phase income is always tax-free. However, NALI is taxed at 45% even in pension phase, which can significantly erode the benefit of the pension exemption.

Australian Regulatory Context

The NALI rules have been part of Australian superannuation tax law for many years, but the NALE rules — which extend the NALI concept to below-market expenses — were introduced by the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Act 2019 and apply from 1 July 2018. The ATO has issued Law Companion Ruling LCR 2021/2, which provides detailed guidance on the application of the NALE rules.

The ATO's guidance confirms that the NALE rules apply to both specific and general expenses, and that the taint from a specific asset NALE is permanent — meaning all future income from the affected asset is treated as NALI, even after the trustee ceases to provide services to the fund. This is a particularly harsh outcome for trustees who perform trade work on fund property.

Professional bodies including CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ), and the Institute of Public Accountants (IPA) have raised concerns about the breadth of the NALE rules and their potential to penalise trustees who provide minor or incidental services to their funds. Treasury has consulted on potential amendments, but no legislative changes have been enacted as of October 2026.

The Australian Taxation Office (ATO) actively audits SMSFs for NALI and NALE compliance as part of its broader SMSF compliance program. Funds identified as having NALI or NALE issues may be subject to amended assessments, penalties, and interest charges. An accountant with SMSF expertise can help trustees identify and remediate compliance risks before they attract ATO attention.

Questions to Ask Your Accountant

When engaging an accountant to assist with SMSF NALI and NALE compliance, the following questions will help you assess their expertise and ensure your fund is properly protected.

• Have you reviewed all transactions between our SMSF and related parties to confirm they are on arm's length terms?
• Are there any services I currently provide to the fund — in my professional capacity — that could trigger NALE?
• How should we document the arm's length basis for related-party transactions to protect the fund in an ATO audit?
• If NALE has already occurred, what are the options for remediation, and what is the likely tax impact?
• How does the NALI taint affect the fund's pension phase income, and what steps can we take to minimise the impact?
• Are there any proposed legislative changes to the NALE rules that we should be monitoring?
• Can you assist with the preparation of the fund's annual financial statements and tax return to ensure NALI and NALE issues are correctly reported?

How MyMoney® Can Help

The NALI and NALE rules represent one of the most technically complex areas of SMSF compliance in Australia. Getting them wrong can result in a 45% tax rate on fund income — a devastating outcome for trustees who are trying to build their retirement savings. Working with a qualified accountant who specialises in SMSF compliance is the most effective way to manage this risk.

MyMoney® connects SMSF trustees with experienced accountants who understand the nuances of the NALI and NALE rules and can provide practical, compliant strategies for managing related-party transactions. Whether you need a comprehensive SMSF compliance review, assistance with ATO audit correspondence, or ongoing accounting support for your fund, our marketplace makes it easy to find the right professional.

Post a Brief to describe your SMSF situation and receive proposals from qualified SMSF accountants. Alternatively, Browse Accountants on the MyMoney® Marketplace to find a specialist who can help you navigate the NALI and NALE rules and keep your fund compliant in 2026 and beyond.