The rules governing related-party transactions in SMSFs are designed to prevent trustees from using fund assets for personal benefit. The SIS Act imposes strict limits on what an SMSF can buy from, sell to, or do business with parties related to its trustees and members.
The Arm’s Length Requirement
The foundational rule is that all SMSF transactions must be conducted on arm’s length terms — that is, at prices and on conditions that an independent party would agree to in the same circumstances.
This applies to:
- Buying or selling any asset
- Renting property to or from a related party
- Borrowing under an LRBA from a related party
- Receiving services from related parties (accounting, administration)
The arm’s length test prevents related parties from giving the fund sweetheart deals (which would benefit the fund at the expense of the counterparty’s tax position) or stripping assets from the fund at below-market prices.
Prohibited Transactions — What the SMSF Cannot Do
The following are flatly prohibited regardless of market value:
1. Acquiring Residential Property from a Related Party
An SMSF cannot purchase a residential property from a trustee, member, or any related party — even at full market value. This is one of the most misunderstood rules. You cannot sell your investment property or home to your SMSF.
2. Acquiring Collectables and Personal Use Assets from Related Parties
Art, wine, jewellery, cars, and other collectables cannot be acquired from a related party.
3. Lending to Members or Beneficiaries
An SMSF cannot lend money to any member or beneficiary of the fund, except in very limited circumstances through a compliant LRBA.
4. Providing Financial Assistance to Members
Providing financial assistance to members (or relatives of members) using the fund’s resources is prohibited. The fund’s assets must be used only to provide retirement benefits.
Permitted Transactions — What the SMSF Can Do With Related Parties
Despite the restrictions, several related-party transactions are permitted:
1. Business Real Property Acquisition from a Related Party
An SMSF can purchase commercial property (business real property) from a related party — for example, a business owner’s warehouse or office — provided:
- The property is used wholly and exclusively in a business (not partly residential)
- The price is at market value (supported by an independent valuation)
- Subsequent rent is charged at market rate
This allows business owners to sell their business premises to their SMSF and then pay rent to their super fund — a legitimate and commonly used strategy.
2. Listed Securities Acquired from Related Parties
An SMSF can acquire ASX-listed shares, ETFs, or other listed securities from a related party — at market price (the exchange price on the day of transfer).
3. In-House Assets Within the 5% Limit
Related-party investments that qualify as in-house assets can be held up to the 5% limit.
4. Related-Party LRBAs
An SMSF can borrow from a related party under an LRBA, provided the loan meets the ATO’s safe harbour terms (market interest rate, maximum LVR, appropriate loan term). See the SMSF LRBA guide for more detail.
5. Services from Related Parties
An SMSF can engage related parties to provide services (e.g. property management, accounting, administration) — but the services must be charged at arm’s length market rates and the related party must be appropriately qualified.
Summary Table — Related-Party Transactions
| Transaction | Permitted? |
|---|---|
| Buy residential property from related party | No |
| Buy commercial/business real property from related party | Yes (at market value) |
| Buy listed shares from related party | Yes (at market price) |
| Buy collectables (art, wine) from related party | No |
| Lend money to related party | Only up to 5% in-house asset limit |
| Lend to a member | No |
| Borrow from related party (LRBA) | Yes (at safe harbour rates) |
| Rent property to related party (residential) | No |
| Rent commercial property to related party | Yes (at market rent) |
| Hire related party to manage property | Yes (at arm’s length rate) |
Consequences of Breaching Related-Party Rules
Breaches of the related-party transaction rules can have severe consequences:
- Non-arm’s length income (NALI): If a transaction is not at arm’s length, any income derived from it may be treated as NALI and taxed at 45% instead of 15%
- Sole purpose test breach: Transactions that provide a current-day benefit to related parties may breach the sole purpose test, threatening the fund’s complying status
- Civil and administrative penalties: Specific contraventions attract civil penalties per trustee
- Non-compliance: In serious cases, the ATO can make the fund non-complying, taxing it at 45% on all assets
- Trustee disqualification: The ATO can disqualify trustees involved in serious related-party breaches
Frequently Asked Questions
Can a trustee charge the SMSF for time spent managing it? No — trustees cannot charge the fund for time spent in their capacity as trustee. This is considered a fundamental trustee obligation. However, if a trustee provides professional services to the fund in their professional capacity (e.g. an accountant trustee doing the fund’s accounting), they can charge market rates — but this is the subject of complex NALI provisions and ATO guidance. Specialist advice is required.
Can the SMSF rent a property to an adult child of a trustee? No — an adult child is a related party (as a relative of a member). An SMSF cannot rent a residential property to any related party. A commercial property can be rented to a related party at market rates for genuine business use, but residential cannot.
We want to transfer our business premises (commercial property) into our SMSF. Is that allowed? Transferring (as a contribution in specie or a sale) of commercial business real property from a related party to the SMSF is permitted — subject to:
- The property qualifying as business real property (used wholly in a business)
- The transfer being at market value
- In specie contributions counting against contribution caps
- Stamp duty considerations (state-specific — some states offer concessions for SMSF transfers)
Seek specialist advice before proceeding.
For further guidance, see the ATO’s related-party transactions guidance. Consult a licensed SMSF specialist or registered tax agent for advice on your situation.