The trustees of self managed superannuation funds (SMSFs) must be aware of the non-arm’s length income (NALI) provisions and how they interact with other areas of tax and superannuation law. Part 4 of this series considers NALI interactions with contributions and the capital gains tax (CGT) provisions.
Contributions and NALI
Despite the recent changes to NALI, there remains significant uncertainty around the distinction between a contribution and non-arm’s length expenditure (NALE) — Refer to part 3 of this series of NALI articles for an overview on the General NALE provisions, here.
For example, where a related party pays an expense on behalf of an SMSF, the ATO’s long standing position as outlined in TR 2010/1 provides:
174. Where a person pays an amount to a third party to satisfy a liability of a superannuation provider, the superannuation provider is taken to have constructively received the payment made to the third party on the superannuation provider’s behalf.
Thus, where a member pays an expense, such as an accounting fee on behalf of an SMSF, the ATO generally considers this to be a contribution.
However, due to the recent amendments to the NALI provisions (ie, General NALE), where a member or related party pays an expense on behalf of an SMSF, the fund will have a lower or nil expense, invoking NALE.
The question is which one ‘wins out’ – is the expense payment on behalf of the fund, a contribution or is it NALE?
Presumably NALE can be averted if the SMSF treats the expense as a journalised contribution immediately or soon after the expense is paid.
Although journalised contributions can be problematic, as it may not be immediately obvious for whose benefit the ‘contribution’ is made. For example, if there are two members of the fund, is that contribution intended to be split 50/50 or on some other basis?
It is important to be aware that if the fund does not record the expense payment as a contribution, the ATO is likely to treat the expense payment as NALE.
Unfortunately, the ATO’s revised TR 2010/1 does not provide any further clarification on this issue and therefore the position regarding contributions and NALE remains unclear.
CGT and NALI
The ATO‘s view on the interaction between the NALI and CGT provisions of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) is reflected in TD 2024/5. (References to legislation are references to the ITAA 1997).
Section 295-550(1) defines NALI to include an amount of ordinary or statutory income, and statutory income includes net capital gains calculated under the method statement in s 102-5(1). Thus, there is an issue as to whether a capital gain that is tainted as non-arm’s length (NAL) and therefore subject to NALI will impact another capital gain in the same financial year that is not tainted.
The ATO state in TD 2024/5:
- …a capital gain made by a superannuation fund that arises as a result of a scheme – the parties to which were not dealing with each other at arm’s length – is NALI under subsection 295-550(1) where one or more of the following applies:the amount of the capital gain is more than the amount the superannuation fund might have been expected to derive if the parties had been acting at arm’s length in relation to the scheme … (paragraph 295-550(1)(a)); or
for an SMSF or an APRA-regulated superannuation fund with no more than 6 members – in gaining or producing the capital gain, NALE is incurred (including nil expenditure) in respect of a CGT asset that is less than the amount of a loss, outgoing or expenditure that the superannuation fund might have been expected to incur if those parties were dealing with each other at arm’s length in relation to the scheme (paragraphs 295-550(1)(b) or (c)).
The ATO further confirms in TD 2024/5 that the interaction between NALI and the CGT provisions can lead to a NAL capital gain, tainting an arm’s length capital gain. The following summarised examples from TD 2024/5 show that a NAL capital gain can ‘taint’ an arm’s length capital gain:
Example 1: shows that a $500,000 arm’s length capital gain is tainted by a $2 million NAL capital gain.
Example 3: shows that a $1 million arm’s length capital gain is tainted by a $5 million NAL capital gain.
A NAL capital gain tainting an arm’s length capital gain is best highlighted in Example 3, where an SMSF receives inflated capital proceeds of $5 million for an asset worth $1.5 million. This example demonstrates that, where a NAL gain is realised in the same financial year as an arm’s length gain, the entire net capital gain can be tainted and taxed at the NALI tax rate of 45%. Here, the $1 million arm’s length capital gain was tainted by the NAL capital gain and taxed at 45%.
Having regard to the above examples, one may think that an arm’s length capital gain will always be tainted by a NAL capital gain, eg, would a $100.00 NAL capital gain taint a $1 million arm’s length capital gain (assuming they were realised in the same financial year)?
Perhaps, surprisingly, this is not necessarily the outcome and tainting will generally not occur unless the NAL capital gain exceeds the amount of the net capital gain after applying capital losses and any CGT discount to the capital gains. This is because a NAL capital gain cannot exceed a fund’s net capital gain calculated in accordance with the method statement in s 102-5.
For example, assume a fund realises a $300,000 arm’s length capital gain and a $700,000 NAL capital gain, this results in a combined capital gain of $1 million (assume there is no capital loss). Once you apply a CGT discount, the net capital gain is $666,667. When applying the steps in the method statement in s 295-10, the taxable income is split between the low tax component (LTC) and the NAL component in accordance with s 295-545. Broadly, the NAL component is calculated first under s 295-545(2) and (2A) and the LTC is any remaining part of the entity’s taxable income for the income year. In this example, assuming the fund’s net capital gain is $666,667, there is no remaining part of taxable income to constitute a LTC. Thus, where a super fund has both arm’s length and NAL capital gains, you need to work through the relevant method statements (s 102-5 and s 295-10) and perform the calculations to work out the extent that any NAL capital gains will taint an arm’s length capital gain.
Notably, in TD 2024/5, the Commissioner expressly rejects the view that the amount of NALI in relation to a NAL gain can be calculated by reference to the tainted gain alone. Instead, it must be considered in relation to an amount that takes into account both arm’s length and NAL capital gains.
This aspect of NALI is particularly nasty!
Conclusions
Despite the recent revisions to ruling TR 2010/1, the interaction between the NALI provisions and contributions remains uncertain for SMSF trustees. When in doubt, expert advice should be obtained so the NALI provisions are not enlivened. Naturally, DBA Lawyers would be pleased to assist.
Unfortunately, one aspect of NALI is clear, the interaction between the CGT and NALI provisions can result in excessive tax liabilities for the most minor and inadvertent of NAL capital gains. An urgent legislative fix is required to address disproportionate and unfair outcomes.
Related articles
- NALI & NALE Part 1 — NALI still needs fixing
- NALI & NALE Part 2 — Dividend, fixed trust and non-fixed trust – NALI
- Let’s focus on General NALE (not NALI) – Part 3
- How does NALI interact with CGT –– TD 2024/5
- NALI/E – urgent fix still needed
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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 online SMSF training. 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 ([email protected]) and Fraser Stead, Lawyer ([email protected]).
DBA LAWYERS
7 November 2025
