Advanced search

Top Navigation

Draft legislation issues on proposed NALE changes

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.

On 19 June 2023, Treasury released Exposure Draft ‘Treasury Laws Amendment (Measures for Consultation) Bill 2023: Non-arm’s Length Expense Rules for Superannuation Funds’ (NALE Bill) together with Exposure Draft Explanatory Materials (NALE EM).

The NALE Bill and NALE EM provide guidance on the NALI changes announced in the Budget which are discussed 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 where the product of 2 x the NALE is greater than the fund’s actual taxable income, a “upper cap” will be the fund’s taxable income for the income year not including any assessable contributions or any deductions against assessable contributions.

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, the upper cap, would result in $6,000 of actual taxable income being taxed at 45% rather than $10,000 of “notional” NALI.

Other proposed changes

Capital expenses

The 2 x multiple in the NALE Bill will not apply to a loss, outgoing or expenditure of capital or of a capital nature. This is a new development as previously NALE was focused on a general expense, whether of a revenue or capital character.

Advisers will therefore have to apply their tax skills to determine whether NALE will be capped by the 2 x multiple if the NALE is not on capital account. Thus a general expense of a revenue nature should qualify but a capital expense of a general nature will not.

Specific v general expense

The NALE EM states:

1.5     Any non-arm’s length expense will be either a specific expense or a general expense. A general expense will be an expense that is not related to gaining or producing income from a particular asset of the fund. A specific expense will be any other expense. An expense incurred in relation to gaining or producing income as a beneficiary of a trust through holding or acquiring a fixed entitlement to the income of a trust will always be a specific expense.

1.6     For specific expenses the existing treatment will continue to apply, and the amount of income that will be taxed as non-arm’s length income will be the amount of income derived from the scheme in which the parties were not dealing at arm’s length.

The severity of NALI in relation to a specific expense is highlighted in Example 9 in LCR 2021/2 where Trang, a plumber, renovated the kitchen and bathroom to her SMSF’s rental property which exposed the net rental income and future capital gain to NALI.


Under current legislation, general expenditure NALE would result in assessable contributions such as superannuation guarantee contributions, salary sacrifice contributions and personal deductible 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 NALI Bill confirms that NALI will exclude contributions assessable under division 295-C of the Income Tax Assessment Act 1997 (Cth).

Pre-1 July 2018 expenditure to be exempt

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 NALE Bill confirms 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 general expenses.

Current status of NALI/E

Until the NALE Bill is finalised as law, 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 (including concessional contributions) until the new legislation applies.


Many SMSF trustees are not aware of the breadth of these provisions and advisers should ensure there is ongoing education and monitoring for NALI/E risks in their client base.

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

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. Bryce Figot is presenting a webinar on 23 June 2023 and a recording is available shortly afterwards. For more details or to register, visit

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit

By Daniel Butler, Director, ([email protected]) and Bryce Figot, Special Counsel ([email protected]), DBA Lawyers


20 June 2023

Print Friendly, PDF & Email