ATO, Regulation

In-specie contributions not a NALE loophole

In-specie contributions NALE

New NALE provisions still apply where in-specie contributions bridge the difference between purchase price and market value of assets acquired by SMSFs.

The ATO has stipulated in-specie contributions cannot be used to exempt SMSF assets that are purchased at below market value from being caught by the new non-arm’s-length expenditure (NALE) provisions recently passed as law.

During his latest technical webinar, Smarter SMSF chief executive Aaron Dunn acknowledged there are situations where a contract for an SMSF asset acquisition specifies the recorded value of the asset by the fund will consist of a cash component and in-specie contributions, the combination of which will equal the item’s market value, but warned the new NALE rules would still apply in these circumstances.

“The non-arm’s-length expenditure provisions will apply here regardless of whether the shortfall was recorded in the financials as an in-specie [contribution]. So if we’ve tried to work around this issue by saying ‘look it should have been $200,000, and we had a contract for $150,000, let’s just treat the difference because we can do so with an extra $50,000 of in-specie non-concessional contribution’, the ATO is saying ‘no, you cannot do that’,” Dunn said.

“[Further, the regulator is saying] even if you purport to try and do that, we will not deem that to be appropriate and we will still tax the income as a result of that arrangement as non-arm’s-length income (NALI) in the future, both on its ordinary income derived and the subsequent CGT (capital gains tax) event that may occur in the future as well.

“So this results in all income therefore being taxed as NALI. So it is a very important distinction there with in-specie contributions.”

He earlier noted the ATO has granted trustees a transition period allowing them to make sure any services they provided for the fund not charged on a non-arm’s-length basis are rectified by the start of the 2020/21 income year.

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