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Some good news — proposed NALE changes but some bad news on NALI too

By Daniel Butler
June 05 2023
4 minute read
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In January 2023 Treasury proposed a lower than arm’s length (or nil) expense (NALE) be multiplied by five.

For example, NALE of $1,000 would therefore give rise to $5,000 (5 x $1,000) of non-arm’s length income (NALI), taxed at 45% ($5,000 x 45%); resulting in $2,250 tax or an effective tax rate of 225%. (See our prior article that provided a snapshot on Treasury’s Consultation Paper on ‘Non-arm’s length expense rules for superannuation funds’ dated 24 January 2023 (Treasury Paper). Click here to access this article.

Fortunately, the 9 May 2023 Federal Budget announced some good news on NALE. The key change for the SMSF industry was the 5 times multiple being reduced to two. This will result in a lower NALE expense of $1,000 being multiplied by 2 (2 x $1,000) and then taxed at 45% ($2,000 x 45%) resulting in $900 tax or an effective tax rate of 90% on NALE.


We explore this and the other NALI changes announced in the May 2023 Federal Budget below.

NALE changes

The proposed 2 x change only applies to a lower general expense relating to an SMSF or small APRA fund and not in relation to expenses relating to specific assets (or income sources). The NALI rules in relation to specific assets (or income sources) have been operating well before the NALE changes commenced from 1 July 2018.

Example applying a 2 x multiple:

If an SMSF trustee uses a member’s brother’s accounting firm’s services, which would usually cost $5,000 under an arm’s length relationship but is not charged any fee, this is considered NALE as the parties were not dealing at arm’s length. Therefore, the tax payable would be calculated as follows:

  • 2 x $5,000 = $10,000 NALE
  • $10,000 x 45% = $4,500 tax payable by the fund.

Note that the Treasury Paper also stated that where the product of 5 times the NALE is greater than all the fund income, all fund income will be taxed at the highest marginal rate. Although we expect this ‘upper cap’ to be part of the proposed legislation, this statement was not expressly reflected in the Federal Budget announcement. We therefore need to wait and see the draft legislation to find out.

Referring to the above example of the SMSF member’s brother’s firm providing accounting services valued at $5,000 for free, where the amount of NALI under a 2 x is $10,000 but the fund’s actual taxable income is only $6,000 then the upper cap, if introduced, would result in $6,000 of actual taxable income being taxed at 45% rather than $10,000 of ‘notional’ NALI.

Other proposed changes in the May 2023 Federal Budget


Prior to the May 2023 Federal Budget (indeed, under the current legislation), general expenditure NALE would result in assessable contributions such as superannuation guarantee (SG) contributions, salary sacrifice contributions and personal deductable contributions being taxed as NALI at 45%.

The ATO in LCR 2021/2 at [19] stated:

In some instances, the non-arm’s length expenditure will have a sufficient nexus to all of the ordinary and/or statutory income derived by the fund.

Under the ATO’s view of the current NALI provisions, a lower general expense would cause all income to be NALI including statutory income such as:

  • concessional contributions;
  • net capital gains; and
  • franking offsets that are associated with any franked dividends.

Fortunately, the May 2023 Federal Budget has confirmed that NALI will exclude contributions. This is a welcome and sensible measure as the current maximum tax rate on concessional contributions is up to 120% (where Division 293 tax, an excess contribution arises and NALI applies). Click here for an article we previously prepared that covers this.

Pre-1 July 2018 expenditure to be exempted

Prior to the May 2023 Federal Budget (indeed, under the current legislation), NALE could apply retroactively as it could apply to income derived after the introduction of the mid-2018 NALE changes.

Fortunately, the May 2023 Federal Budget has confirmed that expenditure incurred prior to 1 July 2018 will be exempt from NALI.

Large APRA Funds exempt from NALE

Large APRA Funds will be exempted from NALE in relation to both general and specific expenses.

Current status of NALI/E

Legislation still needs to be finalised before the above proposals become law. Until then, advisers and SMSF trustees need to be careful to minimise any NALI/E risks.

Importantly, the ATO’s administrative practice in PCG 2020/5 no longer applies after 30 June 2023. This practice involves the ATO not applying compliance resources to NALE of a general nature prior to 30 June 2023. Thus, technically under current legislation, NALE of a general nature can give rise to all ordinary and statutory income until the new legislation applies which will cap general NALE with a 2 x multiple.

Unfortunately, we do not know when the new legislation will be available or its final form. Hopefully, the above changes will apply retroactively for NALE matters back to 1 July 2018.


Many SMSF trustees are not aware of the breadth of these provisions and advisers should ensure there is ongoing education and monitoring for NALI and NALE risks in their client base. Advisers also should ensure they have benchmark evidence on any ‘staff’ discounts for SMSF services they provide.

While this is some good news for general NALE, hopefully, more consultation will occur before the legislation is finalised as further changes were sought by the SMSF industry. Moreover, specific NALI remains an ongoing serious concern that exposes all future ordinary and statutory income to a 45% tax rate including a future net capital gain on disposal of the asset.

Example 9 in LCR 2021/2 involved a Vietnamese female plumber who renovated her SMSF rental property and exposed that to NALI forever! This example highlights one shortcoming of NALI, that there is no formal means to rectify honest mistakes.

Naturally, we would be pleased to assist with advice, training and assisting with any representation in relation to NALI/E matters.

Related information

For related information and articles:

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly SMSF training online. Daniel Butler is presenting an SMSF Online Update on 9 June 2023 and a recording is available shortly afterwards. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler, Director, (This email address is being protected from spambots. You need JavaScript enabled to view it.), Bryce Figot, Special Counsel (This email address is being protected from spambots. You need JavaScript enabled to view it.) and Nick Walker, Lawyer (This email address is being protected from spambots. You need JavaScript enabled to view it.), DBA Lawyers

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