Arm's length transaction means that all documentation, terms and other arrangements associated with the transaction are as if they would be had an external unrelated party been involved in the transaction.

All investments of a DIY Super Fund must be made on an arm's length basis. The investments must be entered into and maintained on a commercial basis.

The nature of this 'arm's length' requirement will result in greater scrutiny where the parties to the transaction are related. If transactions are on commercial basis than it is more likely that they will be treated at Arm's Length.

Examples of types of transactions that a DIY Super Fund can get involved with a related party are

  • interest on loans,
  • rent from property
  • profit on sale of assets, etc.

Assessing whether a transaction is on an arm's length basis, trustee of a DIY Super Fund should consider whether:

  • the asking price is a fair price given the expected return on the asset, the risks to which the asset is exposed, and the relative liquidity of the asset;
  • the projected returns of income and/or capital are in line with market expectations;
  • the contract or agreement adequately protects the interests of the DIY Super Fund, with clear legal identification of all parties and their rights and obligations;
  • valuations have been obtained, where appropriate; and
  • any investment in a depreciating asset factors in an amount to recover the depreciation.

All of the above factors would be considered to determine an investment as being on an arm's length basis; each issue could contribute to evidence in support of the transaction.

Significant civil and criminal penalties may apply to trustees of DIY Super Fund who contravene the arm's length provisions. Failure to comply with the arm's length rule may also result in the fund becoming a non-complying DIY Super Fund.