Self-managed superannuation funds offer genuine flexibility. As a trustee, you can invest in assets that are simply not available through retail or industry funds — commercial property, private company shares, direct shares and more. But that flexibility comes with a legal framework that is more demanding than most trustees realise. Two rules in particular are consistently misunderstood and regularly breached.

Rule 1: The sole purpose test

The sole purpose test requires that your SMSF be maintained for the sole purpose of providing retirement benefits to fund members. Every investment decision, every transaction, every arrangement the fund enters into must be assessed against this standard.

In practice, this means the retirement interests of fund members must always take priority over the interests of any other person, including family members, business associates, or related companies.

The consequences of a sole purpose test breach can be severe. The ATO can disqualify trustees, and in the most serious cases the fund can be made non-complying — losing its concessional 15% tax rate and being taxed at the top marginal rate on the entire fund balance. Outcomes depend on the facts and circumstances of each case, but the risk is real and the consequences are difficult to reverse.

Rule 2: The arm's length requirement

Superannuation and taxation law both require that all dealings involving fund members, their families or related entities be conducted on arm's length commercial terms, exactly as if the parties were entirely unrelated.

This most commonly arises in two situations: leasing a fund-owned property to a related business, and related parties performing work on fund property.

Related property leases

Leasing a commercial property from your SMSF to your own business is entirely permissible but only if the lease is on strictly commercial terms. This means:

• Rent set at market rates, supported by a written appraisal from a licensed real estate agent
• A written lease agreement prepared by a legal professional, clearly setting out all obligations
• Rent actually paid on time. Arrears that are allowed to accumulate without enforcement risk a non-arm's length income (NALI) finding

Where arrangements are not arm's length, the income from those arrangements may be taxed as NALI at 45% rather than the standard 15%.

Related parties doing work on SMSF property

If a fund member, their family, or a related business performs work on an SMSF-owned property, strict rules apply:

• Market rates must apply: If a related trades company is engaged, the fund must pay market rates, the same as would be charged to any member of the public, supported by documentation for the auditor.
• Members doing work personally: In most cases, trustees cannot charge the fund for their own labour. Doing so risks a NALI assessment.
• Materials purchased by the SMSF directly: All materials must be purchased by the fund itself, not by individual trustees seeking reimbursement.
  

Contact us before proceeding with any related party transaction



The compliance consequences of getting these rules wrong can be severe and difficult to reverse. Please contact us before entering into any related party transaction, lease, or property improvement involving a related party.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.