The alignment between two key pieces of ATO guidance regarding non-arm’s-length dealings has heightened the need for SMSF trustees to ensure property acquisitions are carried out at market value, according to ATO SMSF director Kellie Grant.
Grant said the release of the updated Law Companion Ruling (LCR) 2021/2 and Taxation Ruling (TR) 2010/1 in October last year revised the ATO’s treatment regarding non-arm’s-length expenditure (NALE) and the actions of trustees in providing services to their fund, and procuring property for it, must occur correctly.
“The contributions ruling [that is TR 2010/1] now mirrors the non-arm’s-length income (NALI) LCR and makes it clear where a fund fails to acquire an asset at market value, the shortfall between what is paid and should have been paid had it been dealing on arm’s-length terms with the other party, can only be reported as a contribution in limited circumstances,” she stated in a presentation for The Auditors Institute late last year.
“That’s where the contract of acquisition makes it clear that the fund is acquiring only part of the asset at market value and the remainder of the value of the asset is to be treated as an in-specie contribution and really highlights NALI can’t be rectified by topping up an underpayment by the fund as a contribution.”
She said this meant trustees may want to be even more cautious and seek more information when undertaking these types of transactions.
“It really is vital that trustees ensure they are carrying out arm’s-length dealings with other parties to avoid the application of NALI,” she noted.
“If the fund is purchasing a significant asset from a related party, they need to ensure they’re paying market value for that asset.
“They should even consider getting a valuation for a qualified, independent value to support that the transaction is not going to be tainted by the NALI provisions.”
Frequent contraventions of Superannuation Industry (Supervision) Act section 109, which related to investments by super funds being made on an arm’s-length basis, were also flagged by Grant in her comments.
“Common issues we are seeing are those non-commercial transactions between funds, especially those that lease business real property to a related party, either directly or indirectly, via an interposed trust or company,” she added.
“We see failures to pay the full amount of rent due under the agreement or general failures to adhere to the lease terms relating to any rental increases.
“Those types of non-commercial transactions can also cause in-house asset breaches as the fund’s investment in the related company or unit trust may cease to be exempt from the in-house asset provisions where there’s no evidence of a legally enforceable lease in place between the fund and the related party.”
