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NALI/NALE

Post-fact fixes will not prevent NALE hit

NALE asset value

SMSF members will not be able to recast undervalued assets in their fund as a member contribution and will face the full impact of NALE without documentation.

SMSF members planning to attribute the difference between their stated and the market value of an asset as a contribution to avoid non-arm’s-length expenditure (NALE) provisions will be unable to do so unless that move is documented beforehand, according to an SMSF legal expert.

Cooper Grace Ward senior associate Steven Jell said the ATO’s final ruling on NALE provisions, released in late July, made it clear the acquisition of an asset at less than market value would trigger the provisions and all income from that asset would be non-arm’s-length income (NALI) on which the top tax rate will apply.

“What we see with these acquisitions is that people try to re-engineer the transaction to create or treat the deficiency as a contribution for the purpose of complying with the requirements,” Jell said during a recent webinar hosted by the legal firm.

“The reality is that it is just not good enough. In order for any deficiency in price to meet the contribution compliance requirements and be appropriately documented, there must be some forethought.

“The documents must explicitly show that and be prepared ahead of time. If we don’t have the documents, the situation is going to be that the value of the asset is NALE and the NALI rules will apply.”

Cooper Grace Ward senior partner Clinton Jackson noted a 2010 contribution ruling by the ATO did allow for an asset to be given to a fund and for it to be treated as a contribution by the member who gave the asset, but Law Companion Ruling 2021/2, which contains the NALE provisions, added to the requirements for that process.

“What we are seeing is the ATO has said in the NALE ruling they want documents to be prepared a specific way and SMSF members need to do that to get a contribution to be treated correctly and dealt with in the right way for a member’s circumstances,” Jackson said.

“For everything we see in regards to assets going into a fund, if anything is to be treated as a contribution and categorised correctly, then the documentation is critical and it can’t be fixed later.”

Jell noted this applied even where the transfer and contribution is for only part of an asset and the process required specialised documentation.

“[For property] we are not looking at using the standard real estate sale contract, but one with specific terms that talk about settlement arrangements, how the purchase price will be paid, the obligations of the buyer and seller and how will the member contribution get into the fund, including whether the member is selling the asset to the fund and excusing the trustees from paying the purchase price in exchange for the acceptance of a contribution to the member’s account,” he said.

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