SMSF advisers and trustees concerned about how related-party transactions interact with the non-arm’s-length arrangement provisions in the tax laws should be aware no distinction is made and their obligations are not governed by the relationship between parties, an auditor has noted.
ASF Audits head of technical Shelley Banton said the chief rule governing arm’s-length arrangements for SMSFs was contained in section 109 of the Superannuation Industry (Supervision) (SIS) Act, which did not make a distinction between parties involved in a transaction.
“Section 109 is fairly straightforward and it immediately sets out the expectations of how an SMSF has to deal with other parties and how it will breach section 109 if they don’t,” Banton said in a recent online briefing.
“One of the things about section 109 is that it doesn’t discriminate against related parties. It says ‘other parties’.
“This means it’s everybody and anybody, which is related and unrelated parties, who must deal with the fund on arm’s-length terms and if they do that on non-arm’s-length terms, that can result in the fund breaching 109 and also the fund being subject to the non-arm’s-length income provisions.”
She added SMSF practitioners and members can be caught out by section 109 because their first consideration is whether the other party is related or not or whether the other party is a Part 8 associate or not.
“Section 109 doesn’t care about all that. It takes anyone and everyone because there can be a myriad of reasons why the fund is dealing with the other party at non-arm’s-length terms,” she said.
“This can include things like having some sort of sweetheart deal that’s been done outside the fund so that the other party or the fund can benefit from a non-arm’s-length transaction from within the fund.
“Tax Ruling 2007/1 has established the situation that parties who are not at arm’s-length can deal with each other at arm’s length in relation to a transaction, and parties that are at arm’s length can deal with each other in a way that is not at arm’s length.
“So what that tells us, and what we need to be aware of, is that section 109 has a very wide net that captures everyone.”
