What approach does the ATO Green Book suggest for related party transactions?

The correct approach suggested by the ATO Green Book for related party transactions is that they should be conducted at arm's length and properly documented. This concept of arm's length means that transactions between related parties should be priced as if they were conducted between independent entities in a competitive market. This principle aims to ensure fairness and transparency in the pricing of these transactions, preventing manipulation that could affect tax obligations.

Proper documentation is essential because it provides evidence of the rationale behind the pricing and terms of the transaction. It supports the accuracy of reported income and deductions, ensuring compliance with tax laws and regulations. By maintaining thorough records, businesses can also defend their pricing strategies during audits or reviews by tax authorities, thereby minimizing the risk of disputes.

Ignoring related party transactions or treating them informally would not align with established tax principles, and failing to document them could lead to significant compliance issues. Therefore, the guidance emphasizes the importance of adhering to arm's length principles and maintaining proper documentation in order to uphold the integrity of the tax system.