Arm’s length transactions

Founder and Publisher of the Switzer Report
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As a trustee of your SMSF, you’re responsible for making sure no conflict of interest arises.

To avoid a conflict of interest, section 109 of the Superannuation Industry (Supervision) Act requires you to make and maintain investment transactions on an arm’s length basis. This means your SMSF can’t carry out transactions with related parties of the fund. For example, you can’t use your SMSF to buy your residential home.

There are, as always, some exceptions. In some circumstances, you can use your fund to carry out a transaction with a related party as long as the transaction is made on a commercial (arm’s length) basis. For example, your fund can purchase your business property and rent the property back at a commercial rent.

For purchases, an arm’s-length transaction means that the purchase price should be at market value. Where an asset is difficult to value, a valuation by an independent, external valuer should be obtained.

The actual test that is applied is whether “a prudent person acting with due regard to their own commercial interests would have made such a transaction.” To answer this test, ask yourself:

  • Is the asking price a fair price given the expected return of the asset, the risks to which the asset is exposed and the liquidity of the asset?
  • Are the projected returns of the asset in line with market expectations?
  • Do any contracts adequately protect the interests of the fund, with clearly defined rights and obligations of the parties?
  • Have valuations been obtained, where appropriate?
  • Do any investments in a depreciating asset factor in an amount to recover the depreciation?

For more information, see APRA’s Superannuation Circular No.II.D.5.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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