The key to an SMSF being able to legally acquire assets from a related party was to work through the relevant regulations, but in-specie contributions of listed shares and business real property can still create problems, according to an audit firm.
ASF Audits head of education Shelley Banton said purchasing assets from a related party was generally barred by section 66 of the Superannuation Industry (Supervision) (SIS) Act, but the law did allow for the acquisition, at market value, of listed shares, business real property (BRP), stakes in widely held trusts and SIS regulation 13.22 trusts, a life insurance policy not held by a member or relative of the fund, and an in-house asset that did not exceed 5 per cent of the fund’s assets.
Even where an asset was purchased at market value, Banton said in-specie contributions were an area of danger with listed shares and BRP and could create contribution cap and taxation issues when transferred from the member to the fund.
“[For listed shares] the transfer occurs when the off-market share transfer form is executed, that is, the date the form is signed, regardless of the final transfer date to the share registry. Depending on the year it was intended, this may cause contribution cap issues at the end or beginning of the financial year,” she said.
“Additional care is required to ensure the transfer is done promptly. Cherry-picking the best price (tax-wise) and working backwards so there is a ‘processing delay’ by the share registry indicates the shares were not acquired at market value, resulting in a breach of section 66 of [the SIS Act].”
She added the transfer of BRP, even in part, via an in-specie contribution was under a cloud due to the ATO’s Law Companion Ruling (LCR) 2021/2, which now considers such transfers as non-arm’s-length income (NALI).
“For instance, a BRP has an independent market valuation of $1 million, with the fund paying $800,000 in cash and the other $200,000 paid by an in-specie non-concessional contribution. According to LCR 2021/2, this represents a mismatch,” she said.
“The ATO’s view is that the difference between the $800,000 paid in cash and the $1 million market value does not represent an asset transferred into the fund. As a result, the SMSF has purchased an asset at less than market value.
“Under these circumstances, the fund incurs non-arm’s-length expenditure with any income from the BRP classified as NALI forever.
“For the acquisition to be compliant, the sales contract must specify that the fund is only buying part of the asset: $800,000 for 80 per cent of the investment. A separate in-specie contribution of $200,000 for 20 per cent of the investment occurs on the same day through a separate transfer document.
“While the acquisition involves two entirely separate interests, it continues to comply.
“The key is understanding section 66 thoroughly and triaging each scenario to ensure that an SMSF can legally acquire assets from a related party.”
