While it is not required by law to pay for items that can potentially be caught by the non-arm’s-length expenditure (NALE) and in turn the non-arm’s-length income rules (NALI) using cash, it may be a more preferable way to execute the transaction from a regulator’s perspective, a sector specialist has said.
“I think it’s okay to do an in specie transfer [to pay for professional services provided to the SMSF] because you’re recognising the liability and then you are choosing a certain way to treat it. So it’s not that you’re actually trying to increase the capital of the fund and the net position of the fund ultimately ends up at the same [place],” SuperGuardian education manager Tim Miller told delegates at the ASF Audits Technical Seminar 2021 held online last week.
However, Miller recommended settling these transactions with a cash payment would be a safer strategy for trustees to use when taking into account the recent attitude the ATO has exhibited with regard to in specie transfers.
“Historically we used to [use in specie transfers for] benefit payments or re-contribution strategies and the ATO took a [dim view of that practice],” he revealed.
“So I guess what I’m mindful of is [whether] we get to a regulatory space where the ATO draws that line and says the concept of in specie [transactions is abolished].
“There has been talk of that in the past and so I think it’s an area that we at least need to be conscious of.”
ASF Audits head of education Shelley Banton noted the situation will hinge on whether in specie transfers are perceived to have been used in the proper manner.
“I guess it’s like anything, if it gets used and abused, it’s going to get taken away and it’s going to get taken away and it’s going to spoil the pot for everybody,” Banton said.