“Section 109 essentially sets out the principles that trustees have to deal at arm's length with any other party when it comes to either making an investment or maintaining those investments,” Simmons said.

“Fundamentally, what it comes down to is it ensures that SMSFs are not exploited or improperly increasing superannuation benefits, which are subject to concessional tax treatment.”

Simmons noted that the section comprises two key aspects. First, ensuring the SMSF makes investments on an arm's length basis, and second, maintaining that arm's length relationship for the duration of the investment.

“There's a little bit of nuance between how the provision operates with respect to investing on arm's length and then maintaining the investment on arm's length. I tend to look at those two separately, but the principles are the same,” she said.

However, the definition of "length" requires a little more investigation, she said.

“I take two steps when looking at this. The first is to identify the parties to the transaction, and then to look at the terms of that transaction."

She further explained that in the first step – identifying the parties to the transaction – section 109 must be examined closely because it's not solely about the relationship between the parties but rather the quality of the dealings between them.

“The concept of an arm's length relationship is distinct from that of an arm's length dealing or transaction, even though there might be overlap, we've got to make that distinction,” she said.

“What that means from a practical perspective is that you'll have parties that are not at arm's length, but can deal with each other at arm's length, and vice versa – you can have parties that are at arm's length and can deal with each other in a way that is not at arm's length for a transaction.”

Simmons added that another important element of section 109 is that a non-arm's length party is not limited to what is commonly referred to as a 'related party'.

"Under Section 10 there’s a definition of what a related party is, but this is broader."

“This simply just requires you to establish that there's some kind of connection between the parties, and then that also aligns with the definition of what is arm's length for the Tax Act, which simply says, ‘consider any connection between the parties and any other relevant circumstances’.”

She added that when transacting with related parties under section 10, such as fund members, standard employer sponsors, and part 8 associates, the trust bears a greater responsibility in proving the transaction was conducted on an arm's length basis and must provide supporting evidence.