The arm’s length rule for SMSFs

If you are a trustee of your own self-managed super fund, you’ve probably heard of the ‘arm’s length’ rule.

The concept of ‘arm’s length’ is familiar to businesses the world over. To ensure business transactions are conducted at commercial market values buyers and sellers must act independently, without colluding and without one party influencing the other.

So how does this concept apply to your SMSF?

Broadly speaking, any investments by an SMSF must be made and maintained on an arm’s length basis. That is, all transactions must be conducted at commercial market rates. Buyers and sellers must act independently.

Which SMSF transactions are affected?

SMSFs must ensure that all their investments must be conducted and maintained at arm’s length, including:

• Asset acquisitions
• Asset sales
• Investment returns
• Borrowing/loan arrangements at commercial rates of interest.

This is not as straightforward as it might seem, given that many SMSFs are family affairs. They are also popular with small business owners who may own and lease back business property in their fund. The arm’s length rules around transactions involving these ‘related parties’ are strict.

The rules around related parties

Some of the biggest challenges for SMSF trustees regarding the arm’s length requirements are the rules about related parties. A related party is not just a relative or another member of your SMSF, it includes any of the following associates:

• The relatives of each member
• The business partners of each member
• Any spouse or child of those business partners
• Any company that the member or their associates control or influence
• Any trust that the member or their associates control
• An employer who contributes to the SMSF for the benefit of a member, under an arrangement between the employer and the trustee of the SMSF

Assessing an asset’s market value