The SMSF Association reports:

• “SMSFs delivered a five‑year rate of return that was 1.1 percentage points higher than APRA‑regulated funds.” [smsfassociation.com]

This is based on geometric mean returns across five years.

Conclusion:
Over long‑term periods (5 years), SMSFs outperformed industry and retail funds.

2. FY2025 Performance – Industry/Retail Funds vs SMSFs

A 2026 performance analysis summarised FY2025 returns:

Industry & Retail Fund Returns After Fees (FY2025)

Industry funds outperform retail funds mainly due to lower fee drag.

3. SMSF Performance – FY2025

The same FY2025 performance study identifies that SMSFs perform very differently depending on asset allocation:

SMSF performance by key asset classes (summarised from analysis):

• Australian shares: Strong positive performance in FY2025
• International shares: Strong contributor (similar to APRA funds)
• Property (direct commercial & residential): Mixed depending on gearing & location
• Bitcoin and gold: Many SMSFs with crypto exposure significantly outperformed balanced funds
• SMSFs often have lower cash allocations than industry funds → boosts returns in positive markets

SMSF average performance is not quoted as a single figure, because returns are highly individualised, but the study notes many SMSFs outperformed the standard balanced fund benchmarks.

4. APRA Data – Industry Funds Continue to Dominate in Net Inflows

APRA data to March 2025 shows:

• Industry funds had rolling 12‑month returns of ~5.1%
• Retail funds averaged ~4.7%

However:

• Net transfers: $4.8 billion flowed out of industry funds into SMSFs over 12 months
  (major trend in 2024–2025).
  

5. Balance Size and Performance – Who Wins?

Important: Performance varies significantly depending on SMSF size.

A 2026 evidence‑based analysis finds:

When Industry Funds Win

• SMSF balance < $200k–$500k
• Higher SMSF fixed costs (admin + audit) eat returns
• Behavioural mistakes (poor diversification, bad timing decisions) reduce returns by 1–2% p.a.

When SMSFs Win

• SMSF balance > $500k (especially $1m+)
• SMSFs have access to:
  • Direct property
  • Customised share portfolios
  • Tax optimisation strategies
  • Lower effective cost ratios at scale
• Long‑term returns for SMSFs exceed APRA funds by ~1.1% p.a. over a 5‑year period
  [smsfassociation.com]

6. Cost Comparison – Major Driver of Performance Differences

Typical industry fund fees:

0.8% – 1.3% (balanced option)

Typical SMSF costs:

$3,000–$5,000 total annual fixed costs

This means:

• At $200k balance → 2% cost ratio → industry funds usually win
• At $500k balance → 0.6–1.0% cost ratio → competitive
• At $1m+ balance → 0.3–0.5% cost ratio → SMSFs usually win

7. Key Insights – SMSF vs Industry Fund Performance

Long‑term evidence (2019–2024): SMSFs beat APRA funds by ~1.1% p.a. [smsfassociation.com]

FY2025 short‑term evidence: industry funds averaged 8–9% net returns

SMSF outcomes are highly variable:

• Top‑performing SMSFs (diversified + property + shares) outperform all APRA funds
• Poorly‑diversified SMSFs (e.g., 1–2 shares + high cash) underperform significantly

SMSF performance strongly depends on trustee capability and investment strategy.

8. Summary Table – SMSF vs Industry Fund (2024–2026)

Overall Conclusion

SMSFs outperform industry funds over the long term when balances are large and investments are well‑managed.

Industry funds outperform for smaller balances and trustees with low investment expertise.

Doing so would breach s67’s borrowing prohibition because it falls outside the narrow exceptions in s67A(1)(a).

The Law (s67A SIS Act) — What is Allowed

s67A provides a specific exception to the general borrowing ban in s67, but only if all of the following are true:

1. Borrowed money is applied to acquire a single acquirable asset (plus certain incidental expenses)- only  at the time of acquisition of the property.  [classic.au…lii.edu.au]
2. Money can be applied to refinance a borrowing in relation to that same single acquirable asset (and no other asset).
3. The lender’s recourse is limited to that asset (limited recourse). [classic.au…lii.edu.au]

The ATO’s LRBA guidance aligns with this interpretation and confines LRBAs to very limited, asset‑specific borrowing.

What a “Permitted Refinance” Looks Like

A compliant refinance may:

• Replace the existing LRBA (same asset) with the same or a new lender. [ato.gov.au]
• Cover the unpaid principal + any accrued interest on that LRBA, plus reasonable refinance/establishment costs. It cannot add amounts for any other purpose. [classic.au…lii.edu.au]

Why an Increased Loan Balance Is Not Permitted

1. Purpose test failure (s67A(1)(a))
   s67A only permits borrowings applied to the acquisition of the single acquirable asset and to refinance the borrowing for that same asset. An “equity‑top‑up” or any increase beyond what is required to replace the existing LRBA (plus accrued interest/costs) is not acquisition/refinance of the same borrowing — it is new borrowing for another purpose (for example, improvements or cash‑out), which the Act does not permit.

A refinance that increases the LRBA balance to fund improvements or release equity fails s67A because the borrowing is no longer strictly for acquisition or refinance of the same borrowing for the same asset. Only the outstanding LRBA amount (plus accrued interest and reasonable refinance costs) can be refinanced. Any extra borrowing is outside the permitted exception and risks breaching the SIS Act.

Disclaimer:
The above information is general in nature and is based on the SIS Act and ATO guidance relating to SMSF borrowing and LRBAs. It does not constitute financial advice, legal advice or tax advice. Trustees should seek professional advice specific to their circumstances before acting on this information.

Self‑managed superannuation funds (SMSFs) remain a popular structure for Australians seeking more control over their retirement savings. However, SMSF residency compliance has become one of the most significant risk areas affecting funds between 2024 and 2026, particularly as more trustees work overseas, relocate temporarily, or split their time between countries. Failure to meet the residency conditions can cause an SMSF to become non‑complying, triggering severe tax consequences that can effectively destroy the fund’s value. Understanding these risks—and planning ahead—is now essential for all trustees.

This article outlines the residency tests, common failure points, the latest ATO positions, and the tax outcomes associated with residency breaches.

1. Why SMSF Residency Matters

To maintain concessional tax treatment, an SMSF must remain an Australian superannuation fund at all times during the financial year. The Australian Taxation Office (ATO) has consistently emphasised that an SMSF must satisfy three statutory residency tests:

1. The Establishment Test
2. The Central Management and Control (CMC) Test
3. The Active Member Test

These three tests must be passed simultaneously; failing any one causes the fund to lose its status as an Australian super fund. [ato.gov.au]

If an SMSF becomes non‑complying, it will generally face taxation at 47% on its total assets and future income. This penalty has been confirmed across multiple expert sources and remains applicable throughout the 2024–2026 period.

2. The Three Residency Tests Explained

(a) Establishment Test

The SMSF must be established in Australia, or at least one of its assets must be located in Australia at all times. Establishment occurs at the moment the first contribution is accepted by the trustee in Australia. This requirement is typically straightforward and rarely creates compliance issues. [ato.gov.au]

(b) Central Management and Control (CMC) Test

This is the most common point of failure. The CMC of the SMSF must be ordinarily in Australia. This includes high‑level decisions such as:

• Setting or reviewing the investment strategy
• Managing contribution policies
• Making pension decisions
• Appointing or removing trustees

The ATO allows temporary absences of up to two years, provided trustees intend to return to Australia and maintain ties such as property, employment, or family. [ato.gov.au]

However, multiple sources warn that trustees who remain overseas longer than two years, or who make strategic decisions from overseas, risk breaching this requirement. Proposed changes to extend the temporary period from two to five years had not been legislated as of 2026.

Practical examples of CMC breaches include:

• Moving overseas for work for more than two years
• Managing the fund via email or video call from abroad
• Making investment decisions while living offshore

(c) Active Member Test

If the SMSF has active members (those making contributions), at least 50% of fund assets attributed to active members must belong to Australian tax residents. [ato.gov.au]

Breaches arise when:

• A non‑resident continues making contributions
• Growth in a non‑resident’s account causes them to exceed 50% of fund value
• Rollovers are made to the SMSF while abroad

Trustees may avoid active member test issues by not contributing to the SMSF while overseas and instead contributing to a retail or industry fund, then rolling it over upon returning. [ato.gov.au]

3. What Happens If the SMSF Fails the Residency Tests?

Tax Consequences

If an SMSF fails any of the residency conditions, it ceases to be an Australian super fund and becomes non‑complying. The tax effects are severe:

• The fund’s market value (excluding tax‑free components) is taxed at 47%
• All future income is also taxed at 47%
• Loss of concessional 15% tax rate
  

This punitive outcome often results in hundreds of thousands of dollars in tax. The ATO does not automatically reinstate compliance once a breach occurs; trustees must actively correct issues.

Additional Consequences

• Trustees may be disqualified from managing the SMSF
• The ATO may impose penalties or direct education courses
• The fund may be forced to wind up and roll over to an APRA‑regulated fund

4. Trends and Developments (2024–2026)

Two-Year Temporary Absence Rule Under Review

There has been ongoing industry discussion and proposals to extend the temporary absence safe harbour from two to five years. However, these proposals remain unlegislated as at March 2026. The strict two-year threshold continues to apply.

Focus on Intent and Behaviour

The ATO increasingly examines whether time spent overseas is truly temporary, considering factors such as:

• Where family members live
• Ownership of Australian property
• Employment commitments
• Stated intention to return

Use of Enduring Power of Attorney (EPOA)

Trustees can appoint an Australian‑based attorney under an EPOA to act as trustee in their place. However:

• The attorney must genuinely control the SMSF
• Original trustees must formally cease as trustees
• Offshore direction or “shadow decision‑making” breaches CMC rules
  

Increase in Overseas Living and Remote Work

Between 2024 and 2026, more trustees worked abroad for extended periods. Professional guidance stresses that making decisions while overseas—even if calling them “minor”—can still breach the CMC rule.

5. Best Practices for Trustees (2024–2026)

Before Going Overseas

• Assess whether travel is temporary and likely to remain under two years
• Cease contributions if becoming a non‑resident
• Consider appointing an EPOA who becomes trustee
• Document intentions to return, maintain Australian ties, and keep evidence

While Overseas

• Avoid making strategic SMSF decisions from overseas
• Do not contribute directly to the SMSF
• Keep communication and administration minimal

If Staying Longer Than Expected

• Roll over funds to an APRA‑regulated super fund before breaching
• Consider winding up the SMSF
• Seek professional SMSF residency advice immediately

6. Conclusion

SMSF residency risks have become increasingly relevant in the 2024–2026 period, driven by global mobility, remote work, and extended overseas assignments. The compliance framework remains strict: an SMSF must satisfy the establishment test, the CMC test, and the active member test at all times. A breach leads to devastating tax consequences, with the fund taxed at up to 47% of its total value, along with loss of concessional tax treatment.

Trustees must plan ahead, understand the rules, and take proactive steps—such as pausing contributions, appointing resident trustees, or temporarily rolling assets to an APRA fund—to ensure compliance. With careful management, the risk of residency breaches can be minimised, preserving the fund’s taxation benefits and long‑term strategy.

SuperStream has been mandatory for all rollovers to and from SMSFs since 1 October 2021, and the obligations continue into 2026.
SMSF auditors have specific reporting duties when a fund fails to comply with SuperStream standards.

1. When an SMSF Auditor Must Report a SuperStream Contravention

According to 2026 SuperStream guidance, SMSF auditors must report failures to use SuperStream where required.
This includes any rollover requested after 1 October 2021 that was not processed using SuperStream.

This is treated as a contravention of SISR 6.17, because the trustee has not complied with the prescribed method for rollovers.

If the ACR reporting thresholds are met, the auditor must lodge an Auditor Contravention Report (ACR) with the ATO.
[ato.gov.au]

2. Relevant ATO Reporting Requirements (ACR Guidelines)

ATO requirements for SMSF auditors (2025 guidance) state auditors must lodge an ACR within 28 days of completing the audit where:

• A reportable contravention of SISA/SISR has occurred, is occurring, or may occur.
• The contravention meets the ATO’s reporting criteria (materiality & trustee behaviour).
  [ato.gov.au]

A SuperStream rollover failure becomes reportable when:

• Trustees attempt to process a rollover outside SuperStream without an approved exception.
• Trustees persist in using incorrect ESA/ABN/bank account details causing repeated SuperStream failures.
• Trustees ignore requests to correct SuperStream data issues resulting in non-compliant rollovers.

If the issue does not meet reporting thresholds, it may still be included in the ACR section “other regulatory information”.
[ato.gov.au]

3. What Auditors Should Check in Relation to SuperStream

To confirm compliance, auditors must ensure the SMSF has:

1. Correct SMSF ABN recorded with the ATO
2. Valid SMSF bank account (fund‑name account)
3. Active ESA (Electronic Service Address)
   • e.g., BGLSF360 for BGL Simple Fund 360 funds
     

SuperStream rollovers will fail if these details do not match exactly, triggering auditor involvement and potential ACR reporting.

4. Common SuperStream Issues Auditors Encounter (2026)

According to 2026 practitioner commentary, frequent causes of SuperStream breaches include:

• Incorrect or outdated ESA
• Bank account name mismatch
• Incorrect TFN or member details
• Fund not appearing on SuperStream verification systems
• Trustees attempting manual (non‑SuperStream) rollover requests
  

Auditors must assess whether the trustee has taken reasonable steps to correct the issue; repeated failures often meet ACR reporting criteria.

5. Auditor Responsibility vs Trustee Responsibility

Responsibility	Trustee	Auditor
Ensure ESA, bank account & ABN are correct		✘
Process rollovers via SuperStream only		✘
Verify SuperStream compliance during audit	✘
Report contravention via ACR	✘
Modify IAR if material non-compliance	✘

6. Related ATO Focus Areas (Applicable 2025–2026)

While not specific to SuperStream, the ATO has reiterated that SMSF auditors must:

• Lodge ACRs when required
• Demonstrate adequate audit evidence
• Escalate issues when trustees ignore compliance obligations

SuperStream failures fall within this broader ATO compliance framework.

Summary — What You Must Report as an SMSF Auditor

SMSF Auditor must lodge the ACR within 28 days of completing the audit

Short answer: No — the ATO Trustee Declaration (NAT 71089) cannot be electronically signed. A wet‑ink signature is required, including in NSW.

Why?

Although most SMSF documents can be digitally signed under the Electronic Transactions Act 1999, trustee declarations are specifically excluded because Superannuation Industry (Supervision) (SIS) legislation is exempt from the ETA.

A specialist SMSF auditor confirms:

• “Trustee declarations… must be signed with a wet signature.”

This places trustee declarations in the same category as other SIS‑exempt documents that cannot be electronically signed.

Supporting information

• SMSF documents that fall under Commonwealth law can generally be electronically signed unless they are exempt via the Electronic Transactions Regulations 2000.
• SIS Act documents (including trustee declarations) are expressly excluded from electronic signing under these rules.
  

So what does this mean in practice (including NSW)?

Location‑based rules (e.g., NSW e‑signature laws) do not override Commonwealth SIS Act requirements.
Because trustee declarations are a SIS Act requirement, wet‑ink signing is mandatory anywhere in Australia, including NSW.

The Federal Government has introduced Division 296, a new tax on superannuation earnings for individuals with superannuation balances above $3 million.

The legislation was passed by Parliament on 10 March 2026 and came into effect on 1 July 2026.

This is one of the most significant superannuation changes in over a decade and will affect a small number of high‑balance clients.

• Who Will Be Affected?

Division 296 applies only to clients whose total super balance (TSB) across all funds exceeds:

• $3 million, and
• potentially $10 million for the higher tier.

Only around 1 in 200 Australians are expected to be impacted.

This includes balances held in SMSFs, retail, and industry funds.

• How the New Tax Works

From 1 July 2026, earnings on large super balances will be taxed at higher rates:

• 1. For the portion of the balance above $3 million
• Additional 15% tax on earnings
• Effective tax rate becomes 30% (15% fund tax + 15%)
• 2. For the portion above $10 million
• Additional 10% tax on top of the above
• Effective tax rate becomes 40%
• 3m threshold increases in $150,000 increments
• $10m threshold increases in $500,000 increments

• What’s Not Included Anymore (Important Change)

The original proposal taxed unrealised capital gains.

This has now been removed.

The final law taxes only realised income, which addresses fairness and liquidity concerns—especially for SMSFs holding property.

• How the ATO Will Calculate the Tax

The ATO will:

1. Check each client’s Total Super Balance at 30 June each year
2. Request Division 296 earnings from each super fund
3. Assess the additional tax based on the portion above each threshold
   
   

Clients can pay the tax:

• directly from their SMSF or
• from personal cash (similar to Division 293 arrangements).

• Timing & Transitional Rules
• Division 296 starts: 1 July 2026
• First assessments: 2026–27 financial year
• Transitional year: TSB for the first assessment is taken at 30 June 2027 only
  (giving clients time to restructure if needed)

• Practical Implications for Accountants & SMSF Admin Firms

• 1. Review Clients with High Balances

            Identify clients whose TSB may exceed $3m by 30 June 2027.

• 2. Discuss Contribution + Withdrawal Strategies

            Some clients may want to reduce large balances before 30 June 2027.

• 3. Consider Asset Location Strategies

Assets may be shifted between:

• SMSF
• personal names
• family trusts
• corporate entities

            …depending on tax outcomes.

• 4. Prepare for ATO Reporting Requirements

            Funds will need systems ready to report Division 296 earnings when requested.

• 5. Update Client Advice & Engagement Letters

Ensure communication covers:

• Division 296 thresholds
• Potential impacts
• Additional tax obligations

• Simple Example (Client-Friendly)

            Client Balance: $5.5m at 30 June 2027
            Income for 2026–27: $300,000

• First $3m → taxed at normal SMSF rate (15%)
• Next $2.5m → proportionally taxed at extra 15%

            This results in Division 296 tax applying only to the earnings on the excess $2.5m.

• Key Takeaways for Your Clients
• The new tax only applies to very large super balances
• It starts 1 July 2026
• No tax on unrealised gains
• Thresholds are indexed
• Only a small number of Australians will be affected
• Planning before 30 June 2027 is important

For information, please get in touch with Shiv Parihar on shivparihar@manageyoursuper.com.au

General Advice Disclaimer – The information provided is general in nature and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information, you should consider whether it is appropriate to your circumstances and seek independent financial, tax or legal advice where necessary.

Any examples or scenarios are provided for illustrative purposes only and do not constitute advice. While all care has been taken in preparing this information, no warranty is given as to the accuracy or completeness of the information, and no liability is accepted for any errors or omissions.

Superannuation and tax legislation is subject to change, and you should confirm the current rules with a qualified professional before making decisions.

1. Increasing Regulatory Scrutiny Is Reshaping the Profession

Regulators (ATO and ASIC) have sharply escalated their compliance actions:

• ASIC acted against 28 SMSF auditors in the first half of the 2025–26 financial year, including cancellations, disqualifications, and added conditions. The actions included failures in audit quality, independence, CPD, and practical experience. [asic.gov.au]
• ATO warned that independence breaches and in‑house audit arrangements are under increased scrutiny. [asic.gov.au]

This heavier regulatory action creates a challenging environment for sole auditors, who often lack the internal review processes of multi-partner firms.

2. Higher Expectations for Audit Evidence and Technical Depth

Recent ATO and SMSFA guidance emphasises new and emerging audit challenges:

• Stronger evidence requirements for asset valuations, crypto, property, and LRBAs.
• Updated expectations for NALE/NALI, pension reporting, lodgement, and governance behaviour.
• New guidance on crypto asset auditing and section 66 breaches, arriving in early 2026. [ato.gov.au]

Sole practitioners must now invest heavily in staying technically current, which increases workload and cost.

3. Rising Complexity Creates More Work, But Also More Risk

The ATO reports:

• A growing number of SMSFs hold property, crypto, LRBAs, and complex structures. This increases audit complexity.
• Illegal early access, prohibited loans, and governance failures are increasing. These all demand deeper, higher‑quality audits.

This trend benefits high‑quality, technically strong sole auditors who can handle complex work — but it pressures low‑cost auditors.

4. Low-Cost, High-Volume Models Are Under Direct Attack

ATO and ASIC have repeatedly flagged low-fee or high-volume auditors as high-risk:

• The ATO will target auditors whose fees are so low that audit quality is likely compromised. [smsmagazine.com.au]
• Auditors with low fixed‑price models are specifically highlighted as a compliance concern. [guests.com.au]

Most sole auditors cannot profitably sustain a low-cost model while meeting increasing compliance demands.

Conclusion:
The era of $300–$400 SMSF audits is ending.

5. Independence Restrictions Are Reducing Referral Sources

ATO and ASIC are focusing heavily on:

• In‑house audits
• Reciprocal audits
• Long-standing referral-sourced audit relationships

These independence concerns affect sole practitioners disproportionately, because:

• Many rely on referral relationships with small accounting practices.
• Many operate “in-house” style arrangements.

With increased enforcement, audit independence restructures may be needed for small practices.

6. Many Sole Practitioners Are Leaving the Industry

ASIC reported:

• 22 auditors had registrations cancelled due to lack of recent audit work. Many were sole practitioners not meeting the activity or experience threshold. [asic.gov.au]

This suggests a thinning of the market and a shift toward consolidation.

7. Opportunities Ahead: Sole Auditors Who Excel Will Thrive

Despite the challenges, high-quality sole auditors have strong opportunities:

Specialising in high-complexity funds

Property, crypto, LRBAs, valuations — these require expertise, not volume.

Partnering with boutique SMSF admin/accounting firms

Small firms increasingly need independent auditors they can trust.

Premium pricing

Given ATO and ASIC focus on quality, premium audit fees are more justified than ever.

Demand is increasing

Over 661,000 SMSFs exist, with over $1 trillion in assets — and every fund requires annual audit. [asic.gov.au]

8. The Net Outlook: A Smaller but More Professional Market

What will happen?

Final Verdict: The Future of Sole-Practice SMSF Auditors

Bright for specialists

Sole auditors who are:

• technically strong
• high-quality
• independence-compliant
• appropriately priced

will have more demand and less competition.

✘ Difficult for low-cost, generalist, or part-time auditors

The regulators are effectively removing them from the industry.

Overall

The future is consolidation, professionalism, and premium-quality auditing — not volume or discounting.

1. In‑House Asset Risk (SISA s71)

A commercial property leased to a related party can only be excluded from being treated as an in‑house asset where the arrangement satisfies all of the strict legislative requirements that apply to business real property, including ensuring the property itself qualifies as business real property under SIS law, the lease is properly documented, legally enforceable, and conducted entirely on arm’s‑length terms, rent is supported by objective market evidence, payments are made in full and on time, and no aspect of the arrangement provides a present‑day benefit to the related party that is inconsistent with the sole‑purpose test; failure to meet any one of these conditions will result in the property being classified as an in‑house asset and may also trigger additional compliance breaches, such as NALI/NALE exposure or contraventions requiring reporting to the ATO.

Key requirement: You MUST have an enforceable lease agreement

• A lease to a related party is only exempt if the property is business real property and is subject to a lease or lease arrangement enforceable by legal proceedings.
• No lease agreement = automatic in‑house asset, a serious compliance breach.

If no compliant lease exists:

• The property becomes an in‑house asset, often >5% of fund value.
• The trustees may be forced to dispose of the property if the ATO does not accept remediation.

What the lease must include:

• Market‑based rent and outgoings (supported by independent evidence).
• Clear commercial terms (duration, renewal, default provisions).
• Evidence the lease is followed exactly (rent paid on time, correct amounts).
  

2. NALI (Non‑Arm’s Length Income) Risks

The ATO is placing heightened scrutiny on Non‑Arm’s‑Length Income (NALI) risks arising from related‑party commercial leasing arrangements, specifically targeting situations where lease terms, rent, rent‑free periods, incentives, outgoings, or documentation do not reflect genuine arm’s‑length conditions. Their current compliance programs emphasise that SMSFs must be able to demonstrate, with objective market evidence and enforceable agreements, that every aspect of the leasing arrangement mirrors what would reasonably be expected between unrelated parties dealing at arm’s length.

Under the NALI rules, if an SMSF derives income from a related‑party lease that is not on arm’s‑length terms — whether due to understated rent, inadequate documentation, favourable terms to the tenant, or any non‑commercial dealings — all income that the SMSF earns from that asset is treated as Non‑Arm’s‑Length Income and taxed at the top marginal tax rate of 45%, regardless of whether the fund is in accumulation or pension phase. This penalty can also extend to capital gains, meaning the entire future gain on disposal of the property may also be taxed at 45%, even if the member is receiving a tax‑exempt retirement‑phase pension.

NALI Triggers in related‑party leases:

• Below‑market rent or non‑commercial terms.
• Irregular or late rent payments or lump‑sum yearly payments.
• Lease prepayments >12 months, which may be seen as tax‑motivated and non‑commercial.
  
• Inflated income because the SMSF underpaid for an asset or gained favourable terms.

Documentation standards (critical):

• Trustees must keep clear evidence supporting commerciality: valuations, rental assessments, correspondence, professional advice.
  

3. NALE (Non‑Arm’s Length Expenditure) and Its Link to NALI

If the SMSF receives discounted, free, or reduced‑cost services, or incurs insufficient expenses, this may trigger NALE → which results in NALI treatment on the income of the asset.

Examples relevant to property leasing:

• A related‑party builder renovates the SMSF property at a discount.
• A member performs property management for free.
• Repairs or outgoings are under‑charged or paid by the tenant incorrectly.
  

Consequences of NALE:

• Even a single under‑market expense related to the property can cause all rental income (and related capital gains) to be taxed at 45%.

4. Commerciality Requirements for Related‑Party Commercial Property Leases

To avoid both NALI and in‑house asset breaches, the SMSF must ensure:

Business Use Only

Property must be used wholly and exclusively for business.

Market Rent (with evidence)

• Independent assessment recommended.
• Reassess at each renewal or review period.

Formal, signed commercial lease

• Must match normal industry practice.
• Terms must be followed strictly.
  

Proper valuation evidence annually (ATO expectation)

Adherence to lease terms

• Timely rent payment.
• Outgoings paid correctly.
• No “mate’s rates” or informal variations.

5. Red Flags the ATO Focuses On

The ATO has increased surveillance of SMSFs leasing assets to related parties.
Key red flags include:

• Missing or incomplete lease agreements.
• Rent not paid on time or not paid in full.
• Non‑commercial lease terms.
• Prepaid or irregular rent.
• Missing rental valuations.

6. Tax Consequences of Getting It Wrong

If NALI is triggered:

• All related income (and capital gains) taxed at 45%.

If NALE triggers NALI:

• Even a single small under‑market expenditure can result in all income from the asset being treated as NALI.

If property becomes an in‑house asset:

• Counted toward the 5% limit.
• Likely catastrophic breach requiring rectification or forced sale.
  

7. Best‑Practice Steps for Related‑Party Commercial Leases

To stay safe:

1. Obtain independent market rent valuation at commencement.

2. Put in place a professionally drafted, enforceable commercial lease.

3. Ensure rent and outgoings are paid exactly per the lease.

4. Maintain annual rental valuations.

5. Record everything (emails, rental assessments, third‑party advice).

6. Avoid all discounted or free related‑party services.

These standards align directly with ATO expectations and specialist advisory guidance.