New SMSF expense rules: what you need to know

If you manage a self managed superannuation fund (SMSF), recent changes to tax rules for certain fund expenses could affect you. These changes may even apply to services provided for free. If your fund doesn’t pay market price for services, it could face significant extra tax.

Understanding the new rules

The new rules focus on “non-arm’s length general expenses” – services provided to your SMSF at below-market prices or for free. Income related to these general expenses may be classified as “non-arm’s length income” (NALI) and taxed at 45%. While there are limits to how much income can be taxed this way, the impact can still be significant. 

The new rules took effect on 29 June 2024, but are retroactive to 1 July 2018. This change addresses the previous rules, which were deemed overly strict and went unenforced from 2018–2019 to 2022–2023.

Key points to consider

• General expenses: The rules apply to general expenses not charged at market price. These are expenses that don’t relate to a specific fund asset, such as accounting fees or investment advice that does not relate to a specific investment (eg asset allocation advice).
• Trustee roles: As a trustee, under the superannuation law you generally can’t charge for your duties. However, if you provide services for free, or at a significant discount, as a professional (eg accountant, auditor or financial adviser) the NALI rules may apply.
• NALI limits: The amount of NALI is capped at twice the difference between the actual expense and the market rate. If no expense is incurred, it’s limited to twice the market rate.
• Overall cap: The non-arm’s length component can’t exceed the SMSF’s taxable income (minus assessable contributions plus related deductions).

An example to illustrate

Let’s say Ted, an accountant, is a member and trustee of his SMSF. He provides free accounting services to his SMSF, which would normally cost $3,000.The services are general expenses and are not related to specific assets.

Since Ted provided the services for free, instead of the usual $3,000, and he provided them in his capacity as an accountant, the NALI rules apply.

The NALI amount is twice the value of the services: 2 × $3,000 = $6,000.

If Ted’s SMSF has $15,000 in taxable income and no assessable contributions, the NALI component is capped at the lower of $15,000 or the calculated NALI amount. So NALI in Ted’s case is $6,000 and is taxed at 45%.

Result: Ted’s fund pays $2,700 in extra tax because he didn’t charge for his $3,000 in services.

What this means for you

These new rules could catch out professionals trying to save their SMSF some money. If you’re providing services to your SMSF or getting services at below-market rates, you need to be aware of these rules.

The key takeaways are:

• Be cautious about providing free or discounted services to your SMSF.
• Consider the potential tax implications of not charging market rates.
• Remember that services you provide in a professional capacity may be subject to these rules.
• The tax consequences can be signficant.

Source: ATO - Changes to NALI for SMSFs ; ATO Individuals & Families - Non-arm’s length income