NALE and NALI rules can cause an SMSF’s income to be taxed at the top marginal rate if the fund receives a benefit from non-arm’s length dealings, including expenses that are undercharged or not charged at all. In 2025, the key is understanding how non-commercial arrangements can “taint” income streams and ensuring SMSF transactions are priced and documented properly.
Key Takeaways
- NALE refers to non-arm’s length expenses, such as services provided to an SMSF at below market value.
- NALI is income that becomes taxed at the top marginal rate due to a non-arm’s length benefit.
- NALI can apply even when the SMSF investment itself is legitimate if the expenses are not commercial.
- General “mates rates”, unpaid work, or discounted services are common NALE triggers.
- Documentation and arm’s length pricing are critical for SMSF compliance.
What Are NALE and NALI in SMSFs?
NALE: Non-Arm’s Length Expenses
NALE occurs when an SMSF incurs expenses under non-commercial terms. This includes situations where a service is provided:
- for free
- at a discount
- on terms that would not be offered to an unrelated party
Common examples include discounted accounting, bookkeeping, administration, property management, legal work, or repairs provided by a related party.
NALI: Non-Arm’s Length Income
NALI refers to income that is taxed at the top marginal rate because it is derived from a non-arm’s length arrangement. In SMSF contexts, NALI is often triggered by NALE.
In simple terms: if the SMSF gets an unfair advantage because it did not pay commercial rates for something, the ATO can apply NALI treatment to certain income.
Why NALE Can “Taint” SMSF Income
NALE is not just about whether a transaction looks reasonable. It is about whether the SMSF received a benefit that a typical commercial party would not receive.
That benefit can increase the fund’s net income. The ATO takes the view that where the fund’s income is inflated due to non-commercial expenses, the tax outcome should be adjusted.
This is why non-arm’s length expenses are such a serious compliance issue. They can transform income that would normally be concessional into income taxed at the highest rate.
Common NALE Scenarios the ATO Focuses On
Discounted Professional Services
This is one of the most common triggers. For example:
- an accountant provides SMSF accounting services for free
- an adviser charges far below market rates
- a related-party bookkeeper does the work without charging
Even if the work is done correctly, the pricing is still the issue.
Repairs and Maintenance on SMSF Property
If a related party performs work on an SMSF property at below market rates, this can trigger NALE. The SMSF is expected to deal on commercial terms.
Administration and Compliance Work “Bundled In”
Where SMSF services are bundled into another engagement at no clear market-based price, this can create problems. The ATO may treat the SMSF as having received a non-commercial benefit.
What Income Can Be Affected by NALI?
NALI can affect:
- income generated from an asset linked to the NALE benefit
- in some cases, broader categories of income depending on the nature of the arrangement
The tax impact is significant because it can remove the usual concessional treatment that SMSFs rely on.
This is one reason SMSF structuring and ongoing compliance work should be handled carefully, especially where there are related party dealings or complex arrangements. If your goal is to build more SMSF work long-term, this topic aligns directly with the broader SMSF service pathway: SMSF services.
Why “I Was Just Helping My Own Fund” Is Not a Defence
A common misconception is that if someone is helping their own SMSF, it should be acceptable to discount fees or provide services for free. From an ATO perspective, this is exactly where compliance risk increases.
SMSFs must be run like a regulated financial vehicle. Transactions must be:
- arm’s length
- properly documented
- commercially priced
Intent does not override the rules.
How To Reduce NALE and NALI Risk in Your SMSF
Use Commercial Pricing
If services are provided by a related party, charge a commercial rate. If you are unsure what “commercial” looks like, support it with evidence such as:
- comparable quotes
- market rate schedules
- time sheets and scope documentation
Keep Documentation Strong
The ATO expects records that support why pricing is commercial and how it was calculated. This is particularly important when the service is professional in nature.
Avoid Informal Arrangements
SMSF compliance is an area where informal practices become costly. If you are providing services, you should have:
- an engagement letter or service agreement
- clear invoicing and payment terms
- evidence of work performed
What To Do If You Think NALE Has Already Occurred
If a non-arm’s length expense has already occurred, ignoring it tends to increase risk. Practical steps may include:
- reviewing the extent of the undercharged or unpaid work
- documenting what occurred and when
- considering whether amendments or remediation may be appropriate
- strengthening pricing and documentation going forward
Even where issues are historical, it is often possible to put a stronger framework in place for future years.
How NALE and NALI Connect to Broader Tax and Compliance Strategy
For many SMSF trustees, NALE issues appear alongside other tax and structuring decisions involving companies, trusts, and related parties. If your SMSF sits inside a larger group structure, it may be worth reviewing how your broader compliance approach is managed through a dedicated service path such as trust services or business structuring support via set-up and compliance services.
Next Step: Get SMSF Compliance Advice Before It Becomes Costly
NALE and NALI rules are technical, and the consequences can be severe. If you have an SMSF with related-party dealings, discounted services, or any arrangements that may not be fully commercial, it is worth reviewing your position early.