What can an arm's length transaction mean for a small business?
What is an arm's length transaction?
What can an arm's length transaction mean for small businesses?
- Increased distrust from the business community and time-consuming third party scrutiny to assess a business' operations.
- Disqualification from participating in lending programs, especially for charities and Not for Profit organisations.
- Tax at the highest marginal rates, to discourage businesses from continuing trading.
How to identify if you're trading arm-in-arm
- If one party has significant power over the other. In this case, the transaction bears evidence of external influence to the benefit of either buyer or seller.
- If the transaction leads to the instant and mutual benefit of both parties. This is commonly seen in shareholder disputes, where stakeholders trade with one another tactically to gain a majority say in business decisions.
- If the both individuals or entities involved in a transaction are affiliated. This covers sales between parent companies and subsidiaries, or a trust and its beneficiaries.
How to prove trading has been at arm's length
However, the best way to prove trading has been conducted at arm's length and reduce your tax margin is to use independent auditing. A finance expert will be able to analyse all transactions within your small business and identify signs your motives could be questioned. They can also look at fringe benefits and other factors to determine whether the transaction is arm's length.
For help with expert auditing, contact DFK Crosbie today.
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