What is an arm's length transaction?
Running a self-managed super fund requires trustees to adhere to the superannuation laws and follow a number of specific rules.
One of the most fundamental investment rules for SMSFs is that the trustees must transact on an arm’s length basis to ensure no conflict of interest arises. An arm’s length transaction requires trustees to conduct on a commercial basis as if there was no relationship between the parties.
This means the purchase and sale price of fund assets should always reflect the true market value of the asset, and the income from the assets held by the fund should always reflect the true market rate of return.
SMSF trustees must obtain independent valuations for assets which are not listed on a public market. Furthermore, if a SMSF sells an asset to a related party or member of the fund, the sale price must be at market value.
Any non-arm’s length income is taxed at the highest marginal tax rate. The ATO considers non-arm’s length income as income which is derived from a scheme in which the parties were not dealing with each other at arm’s length and if it is more than the SMSF might have been expected to derive (if the parties had been dealing on a arm’s length basis).
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