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Regulation, Tax

Off-market transfer practices hold NALI trap

Off-market transfers

Trustees should not rely on old habits when processing off-market transfers as NALI rules will create new tax burdens.

SMSF trustees and advisers engaging in off-market transfers need to be aware some established practices dealing with differences related to appropriate consideration are likely to trigger non-arm’s-length provisions in the future.

SuperGuardian education manager Tim Miller said that to date where an SMSF did not pay appropriate consideration in relation to off-market transfers, the fund could treat the difference as a non-concessional contribution, but under proposed non-arm’s-length income (NALI) changes this would trigger a tax event.

“NALI has been something of a quandary for all of us in regard to how the ATO is going to address these NALI rules and one of the things that they’ve addressed is if you do an off-market transfer to a super fund,” Miller said during a recent webinar.

“If you do an off-market transfer and you don’t pay the appropriate consideration for example, and you treat the difference as a non-concessional contribution, then what the ATO have indicated in their NALI practical compliance guidelines is that amount is ultimately an expense that has been paid for by the fund.

“That expense is not on commercial terms and so effectively that asset has been purchased at non-arm’s length, which means the income from that and the eventual capital gains will be a non-arm’s-length transaction.

“I think that’s pretty significant given that for 20 years we have just done this concept of the market substitution where we’ve just substituted the market value for an asset and then dealt with it from a transfer point.”

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