An SMSF trustee using a combination of a part purchase and part in-specie transfer to acquire property is likely to trigger the non-arm’s-length income (NALI) rules, but they can avoid this by structuring the transaction differently, according to a superannuation specialist.
During a webinar hosted by BT Financial Group last week, technical consultant Matt Manning shared an example involving an SMSF trustee, Adam, who personally owns a commercial property rented to a company controlled by him and his wife, but wants his SMSF to acquire it.
The property is valued at $1 million and the SMSF plans to purchase it by paying Adam $640,000 while treating the remaining $360,000 as an in-specie non-concessional contribution.
“The ATO has been explicit that any situation involving a part purchase and a part in-specie transfer as a single transaction will result in non-arms-length income. Advisers have previously said this [view] is nonsensical, but in practice it doesn’t really matter,” he said.
“If something is non-arm’s-length income, the whole income from the asset forever more, including the capital gain upon sale, is taxed at the top rate. It’s not a territory we ever want to be in. This scenario is one of those ones where seemingly a minor oversight can cause a world of pain.”
He further clarified the ATO’s position as outlined in Law Companion Ruling (LCR) 2021/2, particularly in paragraphs 27 to 30, where it confirms combining these two types of transfers in a single transaction constitutes a non-arm’s-length dealing.
However, he suggested the same ruling also provides an exception, which means Adam could avoid triggering the NALI provisions if the transaction is structured in a slightly different fashion.
“[Firstly], I’d suggest that the SMSF simply purchase the property [outright] for the full million dollars. In our example, there would have been a million dollars to do that with, but that would have left the [fund] with no liquidity,” he noted.
“If that’s not practical, then I’d suggest performing two separate transactions, that is, two transfer forms get used. One of the transfer forms for the $640,000 purchase and the other for the $360,000 in-specie contribution.
“Doing it this way is fine, it’s just an extra form that we have to put in and it doesn’t cause non-arms-length income. The [ATO] even gives an example [in LCR 2021/2] in paragraphs 38 and 39, which concludes that where there’s two separate transactions, there’s no non-arm’s-length income issue.”
