Explicit documents critical for avoiding NALI tax bills

“One of the ways in which we’ve historically dealt with some of these issues is to deem that shortfall in the purchase price as being a contribution. Well, the ATO has made it very clear that we can’t be doing that sort of thing anymore,” Mr Jell told delegates at the CGW Annual Adviser Conference.

“If we are purchasing a property for less than market value and it is intended that the deficiency in the purchase price will be treated as a contribution, then your documents really need to be prepared to deal with that.”

Mr Jell gave an example of Bert whose SMSF purchases business real property from himself for $600,000 when the true market value is $900,000.

“There’s a deficiency in the purchase price. The super fund has not incurred an expense in acquiring the asset so the non-arm’s length expenditure rules apply, which means that all rent derived from that asset on an ongoing basis will be taxed at the top marginal rate. The capital gains derived from the eventual proceeds of sale will also be taxed at the top marginal rate,” he explained.

“So, there’s some real issues in making sure we have our documents in place in advance because otherwise, we’re going to end up in a situation where there’s a much higher tax rate than we would expect.”

One of the ways that trustees attempted to get around these issues when they identified a shortfall in the past would be to just treat it as a contribution and put it under the member’s name, he said.

“However, that’s not actually how the non-arm’s length income rules work,” he said.

“There’s nothing wrong with treating it as a contribution, but it needs some forethought and planning and preparation and documents that do the things you actually want it to do.”

For example, the contract of sale, Mr Jell said, should specify that the market value is $900,000 but that the super fund is only going to be paying $600,000 and that the deficiency is going to be treated as a contribution for the seller.

“When you set up your documents and you prepare the process and the strategy, you just need to make sure you include those very clear terms to achieve the outcome that your client actually wants,” he cautioned.

“For example, trustee resolutions that state that ‘yes, it was the spouse that disposed of the property but we’re going to put the additional contribution in the wife’s name rather than the husband’s who’s the seller’. So, it’s just about working through the strategy and what you want it to actually be and there’s nothing wrong with treating it as a contribution but making sure that our documentation stacks up is a really important step.”

Cooper Grace Ward partner Scott Hay-Bartlem said SMSF professionals should also be very careful where the family trust owns the property and the client wants to make a contribution.

“A contribution by a family trust to a member is always going to be a concessional contribution,” Mr Hay-Bartlem cautioned.

“So, you can do it, but it takes a bit more work for a contribution from a trust to be a non-concessional contribution so there’s a few traps that you need to work through to get the result you’re intending.”