A senior sector executive has noted the way in which an SMSF transaction is recorded in the super fund’s financial statements can have it treated as a non-arm’s-length item.
To illustrate the point, Strategy Hub co-founder Tracey Besters used an example of where a family trust lent money, via a limited recourse borrowing arrangement, to an SMSF. Subsequently the fund decided to prepay an amount regarding the loan liability as it has the liquidity to do so.
“The accounting [process used] was to treat the [payment] in the SMSF accounts as a sundry asset. There was no reduction of the [loan] principal and therefore no reduction in interest,” Besters told delegates at the Auditors Institute Auditors Day 2026 held in Sydney last week.
“So are we dealing at arm’s length? I don’t think that transaction is arm’s length in terms of the way it has been recorded.
“If I was to record the transaction as a reduction in principal and therefore a flow-on effect [recognising a] reduction in interest, would I be dealing at arm’s length then? Yes I would be. Would I be happy with that? Yes I would be.”
According to Besters, this is a great example of why auditors must look beyond the face value of an arrangement in order to determine the compliance characteristics of a particular transaction as doing so can uncover the motivation behind the transaction.
“At face value the transaction was okay. The intention between the parties was okay. We’re going to prepay [part of the loan] and we want a reduction in [principal] and interest, that’s no problem at all, but then it comes down to how it is recorded,” she noted.
“Because you [as auditors] don’t see the intention [of the transaction]. You don’t know about the intention, do you? You only see the documentation that’s presented to you in order to be able to say this is okay or not okay.
“So we’ve really got to get an awareness of what the transaction needs to look like.”
She highlighted had the transaction been executed with a bank, the prepayment would have triggered a reduction in the interest liability and this would be a good point of reference in these situations.
