If your SMSF owns business real property (BRP) and leases it to a related party, it’s time to take a closer look at your arrangements. The ATO is ramping up its compliance activities around Non-Arm’s Length Income (NALI), and SMSFs with related-party leases are firmly in the spotlight.
Why this matters
NALI rules are designed to ensure that SMSFs don’t gain an unfair advantage from non-commercial dealings. If your fund earns income from a transaction that isn’t conducted on arm’s length terms, that income could be taxed at 45%, rather than the concessional 15% rate. And if your fund is in retirement phase? The exemption for pension income doesn’t apply—NALI is taxed at 45% regardless.
Key compliance requirements for BRP leased to related parties
To stay on the right side of the rules, make sure your SMSF meets these conditions:
- ✅ Business Use Only: The property must be used wholly and exclusively for business purposes.
- ✅ Market Rent: Rent must be at market value, and trustees must be able to provide evidence (e.g. independent valuation).
- ✅ Formal Lease Agreement: A signed lease must be in place, with terms that reflect normal commercial practice—and those terms must be followed.
- ✅ Annual Valuation: A market valuation of the property should be obtained each financial year.
Red flags to watch for
The ATO has flagged several practices that could trigger NALI:
- ❌ Irregular rent payments (e.g. late payments, lump sums, or annual payments).
- ❌ Lease pre-payments exceeding 12 months, which may be seen as tax-driven and non-commercial.
- ❌ Discounted services or expenses (e.g. free property management by a related party), which may fall under Non-Arm’s Length Expenditure (NALE).
Even if the rent amount seems fair, the structure and timing of payments matter. If the arrangement gives a tax benefit to the tenant or isn’t typical of commercial leases, it could be considered non-arm’s length.
What is NALI?
Non-Arm’s Length Income (NALI) is income your SMSF earns from a transaction that isn’t conducted on commercial terms. This includes:
- Acquiring assets below market value
- Receiving inflated income
- Paying reduced or nil expenses for services
If the ATO determines that your SMSF has received NALI, the income—including capital gains—is taxed at 45%, even if the fund is in pension phase.
Final thoughts
NALI is a complex area, and the consequences of getting it wrong are significant. If your SMSF holds BRP leased to a related party, now is the time to review your arrangements. Ensure everything is documented, valued, and transacted on a commercial basis.
Need help reviewing your lease or assessing your NALI risk? Reach out—we’re here to help you protect your fund and stay compliant.