Doing a little plumbing work on your SMSF's rental property for free? Or letting your business use the fund's office space at a reduced rate? While it might seem like a simple way to help out, the ATO sees these "friendly" dealings differently. In the world of Self-Managed Super Funds (SMSFs), a handshake agreement with family or a related business can lead to serious trouble.

The core of the issue is something called Non-Arm's Length Expenditure (NALE). And for SMSF trustees, understanding NALE is crucial to protecting your retirement savings.

What Exactly is an Arm’s Length Transaction?

Think of it like selling your car. An arm's length transaction means you would negotiate the best possible price with a stranger, just as you would expect an independent dealer to do. It's a dealing where all parties act independently and in their own best financial interests, as if they were unrelated entities in a typical commercial setting.

The NALE Trap: What It Is and Why It Matters

NALE occurs when your SMSF pays less than the fair market value for a good or service, particularly when dealing with a related party, such as a fund member or their business. This could be anything from a discounted fee to a service provided for free.

The Bottom Line: The ATO's focus here is to prevent SMSFs from unfairly shifting personal or business expenses into the concessional superannuation environment. If an arrangement is deemed NALE, income related to it can be taxed at a staggering 45%, significantly eroding your fund's returns. Penalties may also apply in addition to this high tax rate.

Common NALE Traps to Watch Out For

1. Discounted or Nil Fees: Providing services to the SMSF for free or at a discount by you or a related party is NALE if you would normally charge for these services.
   1. Example: If you are a real estate agent, then managing a property owned by your SMSF without charging a market management fee can result in all the rental income from that property being taxed at 45% as Non-Arm’s Length Income (NALI).
2. DIY Repairs: You can't perform repairs on an SMSF asset for free if you are in a related business.
   1. Example: If you are a builder and your SMSF needs property repairs, you can charge your SMSF your standard commercial rate, just as you would any other client. However, doing the work for free or at a discount would likely be considered NALE.
3. Leasing Commercial Property: While an SMSF can’t lease a residential building to a related party, commercial dealing is allowed.However, if your SMSF leases commercial property to a related party, you must ensure the rent mirrors what an independent tenant would pay and you can prove this.
4. Buying Materials: Your SMSF is generally prohibited from purchasing materials or goods directly from you or a related party.
   1. Exception: You can act as an agent, but the SMSF must pay the supplier directly, and all invoices must be in the SMSF's name.

A Crucial Distinction: Trustee Duties vs Professional Services

A key rule is that as a trustee, you cannot pay yourself or other trustees for the general administrative tasks involved in running the SMSF. These duties are considered part of your unpaid responsibility as a trustee and include tasks like:

1. Keeping fund records and minutes.
2. Making investment decisions.
3. Signing and lodging paperwork.

However, there is an important exception.

If you are a qualified professional (e.g., a licensed accountant, a solicitor, or a registered builder) and you operate a business that provides those services to the public, you may provide those services to your SMSF. But, the arrangement must be genuinely at arm’s length. This means:

You must be genuinely in business. You can’t just be a hobbyist or someone who does a few side jobs.

• You must charge your SMSF your standard commercial rate. No "mates rates" or discounts.
• You must be appropriately qualified and licensed to perform the duties.

Your 3-Point Checklist for a Compliant Deal:

Before entering any transaction with a related party, ask yourself these three questions:

• Is the Price Right? Would an independent party agree to the same price? Obtain independent quotes or valuations to support all transactions.
• Is It Documented? Do you have all the paperwork to prove the transaction was at arm’s length? Keep all invoices, contracts, and records of how market value was determined.
• Are We Acquiring an Asset? Are we buying a good or material from a related party? If so, this is likely prohibited under superannuation law.

Don't Let a "Friendly" Deal Cost Your Retirement

NALE is a critical area that demands careful attention from all SMSF trustees. The rules are complex, and the penalties can be severe. If you’re unsure whether an arrangement with a related party is compliant, it’s a risk not worth taking.

If you have any questions feel free to contact us to ensure your fund remains on the right side of the law and continues to grow.