SMSF property transactions that have substantial market valuations may be caught under the capital gains tax (CGT) withholding regime even where the transaction is made in specie, unless proper clearances are met, an SMSF specialist has warned.
SMSF Alliance principal David Busoli said while the 12.5 per cent CGT withholding regime was designed to catch foreign transactions, any sale or acquisition of real property with a market value of $750,000, including those conducted by an SMSF, must satisfy procedural obligations to be excluded from the regime.
“Failure of the vendor to deliver a clearance certificate or vendor declaration to the purchaser, unless another exception is satisfied, requires the purchaser to withhold 12.5 per cent for payment to the ATO on or before settlement,” Busoli said.
“If no, or reduced, tax is ultimately payable, the residual will be refunded to the vendor once their tax return is lodged, but it is clearly preferable if it was not deducted in the first instance.”
He said the inclusion of SMSF transactions was not limited to cash purchases, but also included any in-specie transactions and was most likely to occur where an SMSF was selling, rather than purchasing, property.
“An in-specie contribution by a member to their SMSF is unlikely to trigger the provision due to cap limitations. In-specie withdrawals are more likely to be included as the market value trigger rests with the SMSF ‘vendor’,” he said.
“The provision also includes a transfer of title involving SMSF trustee changes and presents another argument in favour of corporate trustees.”
While the $750,000 threshold applied to the market value of the asset, which was typically the purchase price, any non-arm’s-length transactions that did not reflect the asset’s market value could be adjusted by the ATO and raise questions about non-arm’s-length income related to the asset, he noted.
He advised SMSF trustees to check the ATO’s CGT withholding information and requirements around gaining a clearance certificate or vendor declaration, and that a purchaser, relying on the vendor statements in good faith, would not be liable for any fraudulent activity.
Conversely, vendors who provided a false clearance certificate or declaration could be prosecuted and face fines of $8880 (40 penalty units) where the falsity was due to failing to take reasonable care, $17,760 (80 penalty units) for reckless falsity and $26,640 (120 penalty units) for deliberate falsity.