Investments, NALI/NALE, SMSF

Ask clients for arm’s-length proof

arm's-length evidence

Given the complexity of some investment arrangements, SMSF trustees should be providing evidence they have acted on an arm’s-length basis.

SMSF practitioners should question trustees regarding the nature of complicated arrangements within their fund to ensure they have been implemented on commercial terms and based on professional advice to prevent issues with the non-arm’s-length income (NALI) provisions.

Vincents superannuation advisory director Mailene Wheeler said it was important SMSF advisers and accountants ensured parties were dealing with each other at arm’s length when investing in complicated arrangements, including property development, as it was placing a larger burden on auditors each year.

“Sometimes SMSF trustees don’t want to provide that information to us or might not be able to get the information because they are working through a related property developer and not actively managing it, which can make it hard,” Wheeler explained during a recent presentation hosted by The Auditors Institute.

“Yet, what we really need to do is take the time to look at each step in this game to ensure it’s at an arm’s-length basis.

“So, we generally recommend that SMSF trustees get some advice before they do these transactions and make sure everything is on an arm’s-length basis, including a review of the relationships.

“We put that advice on file and it forms part of the information we send to the auditor noting ‘this part of the transaction, such as the initial purchase, has been on an arm’s-length basis with parties that are unrelated’.”

She added SMSF practitioners should also request information about shares held by an SMSF in the arrangements and development and loan agreements and that any transactions and loans are at market value.

“With shares, unit certificates, shareholder agreements or documentation from trustees can confirm it was a market-value acquisition and the development or loan agreements should be formally documented in writing at the time that they are entering into them and not afterwards,” she said.

“We should also make sure the underlying investments or transactions tied to any related-party loans are at a market value and an appropriate rate of interest is charged.

“In asking for this information, we need more supporting information than just an email or a declaration confirming what is going on and we can get better information by asking for benchmarked evidence.

“Benchmark evidence can be looking at what is charged to other clients in that industry for development work or what is the mark-up that is generally charged on these transactions and is that mark-up being applied here.”

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