The difference between the market value and selling price of an asset that is transferred into an SMSF can no longer be used as a contribution and will likely expose the fund to non-arm’s-length income (NALI) issues, according to a technical specialist.
BT Financial Group advice strategy and technical specialist Tim Howard said he had observed discussion in some quarters of the industry in regards to ATO Law Companion Ruling 2021/2 and its NALI implications for asset and in-specie transfers.
Howard said subsections 27-30 of this ruling provide clarity when determining whether the difference can be used as a contribution to a fund.
“Where there is a contract [in place], the difference between the actual market value and the contract price cannot be treated as a contribution, it is a non-arm’s-length expense, and then we have a NALI issue for the SMSF,” he told attendees of a technical webinar held today.
“The terms of the contract must make the purchase price clear. So we need to make sure where there is a contract, it is at market price.”
“[For example], if the market value of an asset is $700,000, but the contract price is below that and it’s a contract for the transfer, that would be a non-arm’s-length expense and that would be an issue.
“In this example, [the individual] still had a contract in place for part of the transfer and an in-specie asset transfer for the other.
“So as a result of that, under the current guidance, that would taint and create a difficulty around NALI for the entire asset.”
To that end, he advised practitioners that obtaining market valuations for the respective asset was often the simplest course of action in these circumstances.
“Most importantly, to avoid some of those non-arm’s-length income or non-arm’s-length expense [issues], make sure that the transfer is at a market value that we can certainly substantiate for the auditors,” he said.