ATO’s alarming interpretation of the non-arm’s length expenditure rules
Following the introduction of the non-arm’s length expenditure rules, the ATO released draft Law Companion Ruling (‘LCR’) 2019/D3 to provide its preliminary views on how the new rules apply. Further, as a result of some quite controversial interpretations made by the ATO in LCR 2019/D3, the ATO also released draft Practical Compliance Guideline (‘PCG’) 2019/D6 to set out its compliance approach to administering certain aspects of the non-arm’s length expenditure rules in the 2019- and 2020-income years.
ATO raises concerns for assets acquired as an in- specie contribution
The new non-arm’s length expenditure rules make it clear that the NALI provisions can apply where a complying superannuation fund purchases an asset at less than market value under a scheme where the parties were not dealing at arm's length. As a loss, outgoing or expenditure under the non-arm's length arrangement may be of a revenue or capital nature, the below-market expenditure on acquiring the asset is the ‘non-arm’s length expenditure’ for these purposes.
When an SMSF acquires an asset from a related party of the fund (assuming the fund can acquire the asset without breaching S.66 of the SIS Act), it will do so by purchasing the asset for its market value consideration or by increasing the relevant member’s interest in the fund by recognising the acquisition as an in specie contribution (or as a combination of the two methods).
However, in LCR 2019/D3, the ATO flagged concerns that some SMSFs may not be correctly dealing with assets transferred to the fund partly as an in specie contribution. In particular, the ATO is concerned with situations where the terms of a contract between the complying superannuation fund and the seller of the asset make it clear that the asset is being purchased by the fund. In these situations, in the ATO’s view, the difference between the consideration paid (if any) by the fund and the market value of the asset purchased under the contract cannot represent the value of an in specie contribution made by the other party.
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