Keeping at Arm’s Length with Your Retirement Savings: Why DIY Repairs in Your SMSF Could Cost You

One of the great attractions of a self-managed super fund (SMSF) is control. You decide how your retirement savings are invested — from shares and managed funds through to direct property.

But with that control comes responsibility. And one of the most common traps we see SMSF trustees fall into is forgetting to keep their dealings at “arm’s length.”

What does “arm’s length” mean?

In simple terms, all investments and transactions in your SMSF must be conducted as if you were dealing with a stranger.

That means:

• You can’t give yourself special treatment just because you’re the trustee.

• You can’t buy, sell, lease, or repair SMSF assets on terms that wouldn’t apply if you were dealing with an unrelated third party.

• Everything must be properly documented, at market rates, and supported by independent evidence if needed.

The rule exists to make sure members don’t receive a current-day benefit from their retirement savings — superannuation is designed for retirement, not for personal use now.

The property repair trap

A common breach happens when trustees own an investment property inside their SMSF. It might feel harmless to grab a paintbrush, fix the gutter, or re-tile the bathroom on a Saturday afternoon. After all, you’re saving the fund some money, right?

Unfortunately, that’s a breach of the arm’s length rules.

Why? Because you’re providing services to the SMSF without charging a commercial rate, which means the fund isn’t dealing with you on the same basis as it would with an independent tradesperson. This creates what the ATO calls non-arm’s length expenditure (NALE).

And the penalty can be severe: if NALE applies, the income earned from that property may be treated as non-arm’s length income (NALI) — and taxed at the top marginal tax rate of 45%.

What you can do

If your SMSF owns property, you can:

• Engage licensed third-party tradespeople to carry out repairs and maintenance, with invoices issued to the fund.

• Ensure rental arrangements are at market rates, supported by independent valuations.

• Keep detailed records to demonstrate the fund is operating on commercial terms.

If you personally own a business in a related trade (e.g. builder, plumber, electrician), you may in some limited circumstances provide services to the SMSF at market rates — but the rules here are very strict, and professional advice is essential before you act.

Why it matters

Trustees who breach the arm’s length rules risk:

• Losing concessional tax treatment on part (or all) of their fund’s income.

• Facing penalties from the ATO.

• Having their SMSF’s compliance status questioned.

And all because of what might have started as a “quick fix” on an investment property.

The bottom line

With an SMSF, it’s essential to remember that the fund is a separate legal entity. Your retirement savings are not the same as your personal assets — and the ATO will not look kindly on blurred lines.

Keeping your SMSF dealings at arm’s length protects not just your compliance status, but also the retirement nest egg you’re working hard to build.

If you’re unsure about what you can and can’t do with your SMSF investments, the safest step is to seek professional advice before you act. At Funded Futures, we can help you navigate the rules and keep your fund on the right track.

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