An SMSF technical specialist has cautioned practitioners to pay particular attention to situations where trustees are looking to offset a capital gain associated with an asset captured by the non-arm’s-length expenditure (NALE) rules with a capital loss.
“You can fix a NALE [and associated non-arm’s length income (NALI)] problem regarding the capital gain on a tainted asset if your client has a big capital loss somewhere because the loss can offset the gain,” Accurium head of SMSF education Mark Ellem noted.
However, Ellem pointed out any capital loss available for the SMSF to use for this purpose really needs to have been incurred in years prior to the sale of the asset to which the NALE and NALI provisions apply to ensure the trustees are not subject to other legal penalties.
“If the capital loss is created in the same year as the NALI asset is sold, could that action be considered tax avoidance? Could that be viewed as a tax avoidance move under Part IVA of the Income Tax Assessment Act?” he asked delegates at the Accurium SMSF Compliance Day 2024 held in Sydney recently.
With regard to the acquisition of SMSF assets at less than market value, a transaction that would invoke the NALE and in turn the NALI penalties, he noted this was an unlikely scenario.
However, he acknowledged there is a myth associated with the purchase of equities, if believed and acted upon, would lead to a NALI situation.
“The examples the ATO provides us about acquiring listed shares [are strange given] you can’t fool anyone on the share price because the share price is listed on that day,” he noted.
“But I do still get thrown at me the comment ‘can’t we use any share price that is 30 days either side of the purchase date’, [an approach that could lead to the acquisition price being less than market value]. That was a stamp duty rule and how long has it been since stamp duty was applied to listed shares? It’s been a while.”
