A trade done cheaply for your own SMSF can tax the fund at 45 percent. The 2024 law changed how far it spreads

Non-arm's length income is taxed inside a complying super fund at 45 percent, the top marginal rate, instead of the 15 percent an SMSF pays on its ordinary earnings. It is one of the sharpest penalties in the super system, and since 1 July 2024 the rules that decide how far it reaches have two different settings, depending on the kind of expense that triggered it. The change arrived through the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024, and while it capped one version of the problem, it left the more damaging version untouched.

The trigger is not always an exotic transaction. For a lot of funds it is the most ordinary thing a self-managed trustee does: some of the work on the fund's assets, done by the trustee.

A general expense and a specific one are now two different risks

The word that matters is "general." A general expense relates to the fund as a whole rather than to a particular asset: the accounting fee, the administration cost, the audit itself. If one of those is charged to the fund below an arm's-length rate, a family member's firm keeping the fund's books for a nominal sum, the shortfall is a non-arm's length expense.

From 1 July 2024, the income that shortfall drags into the 45 percent bracket is capped. For an SMSF, the non-arm's length income arising from a general expense is limited to twice the difference between what the fund paid and the market rate. Books that should have cost $1,500 done for $500 leave a $1,000 shortfall, which produces $2,000 of income taxed at 45 percent, a $900 tax cost. That is a real bill, but it is bounded, and it was not bounded before the 2024 change.

A specific expense has no such cap. Where the underpriced expense attaches to a particular asset, a renovation to one of the fund's rental properties, the non-arm's length dealing taints the income connected to that asset. Not twice a shortfall: the rent from that property, and any future capital gain when it is sold, can be taxed at 45 percent for as long as the fund holds it. One discounted job on one property is capable of following that property all the way to sale.

Where the trustee's own labour sits

This is the part that reaches ordinary funds, because a self-managed trustee is often the cheapest tradesperson available to the fund. The rules draw a line, and it runs through the capacity you are acting in.

Running the fund is trustee work: making the decisions, keeping the records, arranging the audit. Section 17A of the SIS Act prohibits a trustee being paid for those duties, and doing them for nothing does not create a non-arm's length expense. Trustee labour of that kind is expected to be unpaid.

Professional or trade services are different, because they are not trustee duties. A trustee who is a builder, an accountant or an electrician is doing something the fund would otherwise pay an outsider for. There are two clean ways to handle that, and one trap between them.

Charging the fund: four conditions, all required

A trustee can be paid for genuine non-trustee services, but only where every condition in section 17B of the SIS Act is met. The service must be performed other than as trustee; the trustee must be appropriately qualified and hold any licence the work requires; they must perform that kind of service in the ordinary course of a business they run for the public; and the fee must be no more favourable to them than an arm's-length rate. Meet all four and the fund pays a market fee to a related party without a non-arm's length problem. Miss one (the licence, the business, the market rate) and the fee cannot be charged at all, and a fee charged anyway is itself the non-arm's length expense.

Doing it for free: the line is the business behind the hands

The alternative is to charge nothing, and here the ATO's finalised position in Law Companion Ruling LCR 2021/2 is more workable than trustees often fear. Donating your own labour, in your individual capacity, does not by itself make the work a non-arm's length expense. A trustee who spends a weekend painting the fund's rental is not creating non-arm's length income by doing so.

The line is what stands behind the hands. When the work draws on the assets, equipment, staff or trading stock of the trustee's business (the crew, the plant, materials bought at trade cost and passed to the fund for nothing), the fund has received something worth money for less than an outsider would pay. That discount is the non-arm's length expense, and if it attaches to a specific asset it carries the specific-expense consequence, not the capped general one. Personal time is generally treated as safe; the resources of a business are where the exposure lives.

What the audit tests

Every SMSF is examined each year by an approved auditor, and related-party dealings are a standard focus. The defence is contemporaneous evidence: the market rate for the work, a quote or invoice showing what was actually charged, and a note of the capacity the trustee acted in. We set out the wider habit of keeping evidence as you go, rather than reconstructing it at year end, at smsfcore.com/blog/franking-evidence-smsf-audit, and the same discipline applies to establishing an arm's-length benchmark, which starts from the market values a fund records at smsfcore.com/blog/smsf-asset-market-value-30-june.

What we track

SMSF Core records each asset and its related-party dealings with the market-rate benchmark held against them, so a discounted expense is visible as an exposure during the year rather than a finding at audit. There is a sample fund at app.smsfcore.com/demo if you want to see the asset and expense view with data already in it.

SMSF Core is an information tool, not a licensed financial service. Whether a particular arrangement is non-arm's length depends on the facts of your fund. Talk to a licensed adviser or your accountant before acting.