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The latest news on NALI & NALE

By Shaun Backhaus & Daniel Butler, DBA Lawyers
09 June 2022 — 5 minute read

What the extension of the ATO's transitional compliance approach in PCG 2020/5 means for SMSF professionals.

As we draw to the end of FY2022 it is important for advisers to be aware of the changes to the Commissioner’s application of the non-arm’s length income (NALI) provisions. 

PCG 2020/5

In light of the Commissioner’s general expense nexus view causing controversy within the industry (both with large APRA funds and SMSFs), the Commissioner previously issued Practical Compliance Guideline PCG 2020/5 (PCG) on 29 May 2020 which allowed for a transitional compliance approach whereby the ATO would not allocate compliance resources to determine whether the NALI provisions apply to a superannuation fund where it believed the fund incurred non-arm's length expenditure (NALE) of a general nature that had a ‘sufficient nexus’ to all income derived by the fund in a relevant year.

Note that NALE is not a separate tax but NALE can give rise to NALI, eg, a discounted fee by an SMSF trustee/director’s accounting firm can give to NALI on a fund’s entire income subject to the ATO’s administrative concessions discussed below.

The PCG was initially introduced for FY2019, FY2020 and FY2021 with a later amendment to provide that it also covered FY2022.

The ATO published the ‘ATO Advice and Guidance Issue List’ on 6 June 2022 that will extend the PCG to FY2023 and adjust the LCR in line with this extension. The ATO proposes to publish these updates on 10 June 2022.

Accordingly, the transitional compliance in the PCG now applies to general expenditure that is incurred on or before 30 June 2023.

Approach in LCR 2021/2

Law Companion Ruling LCR 2021/2 (LCR) (which contains the Commissioner’s view on NALE having a ‘sufficient nexus’ to all income of a fund) provides for a different compliance approach from 1 July 2022. LCR 2021/2 provides:

  1. Nevertheless, the Commissioner is alive to concerns that a finding that general fund expenses are non-arm’s length is likely to have a very significant tax impact on the complying superannuation fund, even where the relevant expenses are immaterial.


  1. For this reason, from 1 July 2022, where the ATO applies any compliance resources for such general fund expenses, they will only be directed:
  • For an SMSF – toward ascertaining whether the parties have made a reasonable attempt to determine an arm’s length expenditure amount for services provided to the fund, other than services provided by an individual either acting in the capacity as trustee of the SMSF or as a director of a body corporate that is a trustee of the fund, and
  • For a large APRA-regulated superannuation fund – toward reviewing supporting documentation that evidences that appropriate internal controls and processes are in place and that reasonable steps were taken to determine an arm’s length expenditure amount.
  1. Provided this is the case, the ATO will not allocate compliance resources to determine whether those expenses are in fact arm’s length expenses.


  1. This compliance approach does not impact the compliance approach set out in Practical Compliance Guideline PCG 2020/5 Applying the non-arm’s length income provisions to ‘non arm’s length expenditure’ – ATO compliance approach for complying superannuation entities. PCG 2020/5 sets out a compliance approach with respect to non-arm’s length expenditure of a general nature that has a sufficient nexus to all ordinary and/or statutory income derived by the complying superannuation fund that is incurred on or before 30 June 2022.

As noted above, the ATO proposes to update the LCR to reflect the updates to PCG 2020/5, ie, to reflect the end date of the PCG is now 30 June 2023 and the compliance approach in paragraph 92 of the LCR commences from 1 July 2023.

The compliance approach in paragraph 92 of the LCR appears to be based on arrangements where parties were not dealing at arm’s length, as arm’s length parties would generally not make attempts to determine an arm’s length expenditure amount.

Accordingly, any superannuation fund that is reviewed/audited must be able to show that any arrangement where services are provided to a fund is being carried out on an arm’s length basis, or where it was not, that the parties have made a reasonable attempt to determine an arm’s length expenditure amount for those services provided.

It is not clear what would be considered ‘a reasonable attempt to determine an arm’s length expenditure’. Guidance might be found in the similar context of the expected evidence to show the arm’s length nature of a related party loan on the ATO’s webpage ‘PCG 2016/5 frequently asked questions’ (QC 50873).

Protection offered via the PCG

Note that the PCG is not binding on the ATO and provides no protection if the ATO seek to apply NALI in its usual activities. In particular, NALI is often investigated or detected when an SMSF makes a significant return in a financial year especially a large capital gain.

SMSF Trustees also have to be mindful that SMSF auditors may raise NALI as an issue. Some may seek to lodge an auditor contravention report. However, if NALI is invoked, it results in a 45% tax on the ‘non-arm’s length component’ of the income (after subtracting any deductions to the extent that they are attributable to that income).

Specific versus general expenses

Note that where a specific expense is lower than arm’s length, then there is no protection offered and the ATO’s view of the changes to s 295-550(1) and (5) of the Income Tax Assessment Act 1997 (Cth) that apply from 1 July 2018 (regardless of when the scheme was entered into). Thus, an SMSF that purchases an asset at less than market value can result in all future income and capital gains from that asset being taxed as NALI.

Thus, the ATO’s administrative concessions outlined above are only relevant to a lower general expense (NALE) that gives rise to NALI.

Government announcement

On 22 March 2022 the previous Liberal/National Coalition Government announced its intention to make legislative changes to the NALI provisions. This statement included an acknowledgement that the laws needed amending to make sure they operated as intended. See here for the full announcement.

While we understand that the new Labor Government has also shown support for a legislative review, there is no timeframe or steps available to provide any further guidance. Naturally, the Labor Government has to be appropriately briefed and then provide its feedback to Treasury and the ATO is also likely to want to obtain feedback from the recently installed government.


The implications of the NALI provisions continue to give rise to considerable complexity and uncertainty. The above ATO’s administrative concessions provide some welcome temporary relief for the general expenses issues. However, as noted above, the ATO may still apply NALI if its usual compliance activities detect it. A legislative fix is therefore urgently needed.

Advisers should take steps to minimise the risk of the NALI provisions applying and ensure appropriate documentation exists to confirm that all dealings are at arm’s length particularly services that may give rise to a general expense risk. Naturally, expert advice should be obtained if there is any doubt.


The latest news on NALI & NALE
daniel butler shaun backhaus smsf
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