ATO plans to revise the method of how in-specie assets can be used to make a contribution into an SMSF will cause problems where market values are incorrectly stated at the start of the process or where that figure shifts during the transaction, a technical specialist has pointed out.
Smarter SMSF head of education Tim Miller said draft Taxation Ruling 2010/1DC2, recently released for industry consultation, continued to allow a contribution to be made via an in-specie transfer and it would not be considered non-arm’s-length income (NALI) if done at market value.
Speaking during a webinar yesterday presented by SuperGuardian, Miller added currently where the asset value is incorrect, it can be changed and the contribution details can be updated, but the draft will no longer allow that to take place.
“What this draft ruling has stated is the transfer of an asset is actually an acquisition of an asset, which is under a purchase contract and if market value is not paid for the asset, we can’t treat the difference as an in-specie contribution and the transaction will trigger a NALI event,” he said.
He gave an example of a property valued at $1 million for which the SMSF will pay $700,000 and the member will contribute $300,000, which if stipulated as part of the settlement process would be allowed.
However, if the initial valuation was set at $800,000, with the fund paying $700,000 and the member contributing $100,000, and the market value was later determined to be $1 million, NALI would apply.
“This is creating a lot of confusion around the contribution rules and what is and is not going to be NALI and what is a contract in these types of transactions,” Miller said.
He questioned if off-market transfers of assets would be considered a purchase contract from an acquisition point of view as this could have a large impact on assets whose valuations can fluctuate over short time periods, such as shares.
“If the consideration for the number of shares that will be transferred that is first stated does not match the share value on the day that the transfer is executed, have we created a non-arm’s-length expense (NALE) for the fund if we underpaid for those shares?” he said.
“I fear the way the draft ruling is worded might trigger an easy way for the regulator to capture that as a NALE.
“I want some clarity around the ATO’s position as to when the off-market transfer occurs and whether it is the day the transfer is executed and beneficial ownership changes and will we still be able on that day to rectify the consideration and treat the difference as an in-specie contribution if there was no purchase associated with it.”
