An SMSF technical specialist has alerted practitioners to a change in the ATO’s approach with regard to the value shifting of an asset, as set out in Tax Ruling (TR) 2010/1DC, to eliminate the possibility of allowing trustees in these situations from avoiding contribution rules through the adherence to the non-arm’s length expenditure (NALE) provisions.
Accurium senior SMSF educator Anthony Cullen indicated the circumstance the draft tax ruling is looking to address is one where, for example, the sole member of a fund who is a professional builder erects townhouses on vacant land held by the fund but does not raise an invoice for the work.
The scenario will trigger the NALE provisions as the work was not performed on a commercial basis and should also see the SMSF treat the increase in the asset’s value as a concessional contribution.
He pointed out under TR 2010/1DC paragraph 276C the ATO confirmed it would not apply compliance resources to the 2018/19 income year to SMSFs in this predicament with regard to recognising a concessional contribution if the fund applied the NALE rules to the arrangement.
However, he noted the regulator’s stance on the issue has now changed as reflected by TR 2010/1DC2 paragraph 276D.
“[So] the ATO is looking to remove that paragraph, 276C, and put in 276D. Basically, it is saying as the result a case that went to the tribunal, GYBW, it doesn’t like the idea that people can potentially use NALE as a way of circumventing the contribution rules which is effectively what 276C was [allowing]” Cullen told attendees of a technical webinar held today.
“This opens the door for the ATO to say there is a contribution that needs to be recorded, that is the [amount] of the value shift, and because you don’t have all of the paperwork in place to support that [working arrangement] you’re also not dealing on an arm’s length basis so we’re going to capture you under the NALE provisions as well,” he explained.
“So be very careful about that,” he warned.
