All SMSF transactions must be on an arm’s-length basis.
This means that fund assets must be bought and sold at market value, and income on the assets should show a true market rate of return.
This is important if you are dealing with someone who is not at arm’s length to your fund – that is, they are related in some way to the fund.
Here are some examples of trustees breaching the arm’s-length rules:
Judy’s SMSF loaned money to her friend.
The loan was repaid five years later, without interest.
Normally, a commercial rate of interest would have been paid.
Kelly’s business leases its property from her SMSF for half the market rate of rent.
Kelly’s fund is not getting a true market rate of return.
Bob’s SMSF invested in a related unit trust that has never paid distributions to his fund, even though they were due.
Bob was happy for the unit trust to grow instead, but under normal commercial circumstances, Bob’s fund would have demanded payment.
Tony’s SMSF is selling a house. An unrelated buyer offers market value for the property. However, the fund sells to Tony’s son for less than this.
By accepting less than market value, the fund has breached the rules.
Conducting transactions at arm’s length helps you to protect your retirement benefits – it is designed to make sure that you get appropriate returns on the fund’s investments.
If your investments are not at arm’s length, the value of your SMSF assets will suffer, and there could be serious consequences for your fund – and to you personally.
Please call us if you have any questions about arm’s-length rules and investments.
For more SMSF information, take a look at our other videos – or contact us here