SMSF trustees who make an in-specie contribution to their fund consisting of part payment and part contribution must be able to prove it has been made at market value given the ATO will soon be policing breaches of the non-arm’s-length income (NALI) provisions, a technical specialist has said.
Smarter SMSF chief executive Aaron Dunn acknowledged Law Companion Ruling (LCR) 2021/2, in regards to NALI, allows SMSFs to purchase a portion of an asset from a related party as long as it is acquired at market value.
In the lead-up to the ATO ending its non-compliance action regarding NALI and non-arm’s-length expenditure (NALE) breaches on 1 July, Dunn advised trustees to take precautionary steps to comply with this measure by maintaining documentation to support the market value of any in-specie contribution and payment.
“The ATO is saying within that ruling that if you had [an asset] that you’re looking to transfer in and you want to make a part contribution and part payment, if you don’t stipulate from a market value point of view that there’d been a payment, then from a NALI perspective you taint the ordinary and statutory income for the life of that asset,” Dunn told attendees at a technical webinar last week.
Smarter SMSF technical and education manager Tim Miller added the need to comply with the NALI regime could also create challenges for SMSF members who personally cover fund expenses and consider these to be a contribution.
“LCR 2021/2 sort of pulls back on what we thought we knew in Tax Ruling 2010/1 and SMSF Ruling 2010/1 as to what is a contribution and an acquisition, and utilising in-specie contributions by doing a part purchase, part contribution from a valuation point of view,” Miller said.
“In light of the NALE provisions, saying ‘we didn’t pay for it so we’ll just treat that expense as a contribution’ [is] not going to cut it like it has historically, unless well documented in advance.
“So we want to make sure that we don’t taint assets with NALE, [which means] being diligent in the way we go through [the documentation process].”