Practitioners warned on impact of NALI changes on in-specie transactions

He noted it is not unusual for an asset to be acquired from a related party partly by way of purchase for cash and partly by way of an in-specie contribution.

“An example would be the acquisition of a $1 million business real property from a member where the fund pays the member $670,000 and regards the remaining $330,000 as a non-concessional contribution from the member. The ruling does not prevent this but does make it clear that the detail of the process is vital,” he said.

“Typically, such a transaction involves a single sales contract for the entire property but, under this ruling, the difference between the consideration paid by the fund and the market value of the asset purchased under the contract cannot represent an in-specie contribution. 

“This is because there is no other asset being transferred to the fund that can be regarded as an in-specie contribution.”

Instead, as the fund has paid less than the market value of the asset, the non-arm’s length expenditure provisions will apply to the purchase, and all income derived from that asset will be NALI (including any capital gains on the disposal of the asset), according to Mr Busoli.

“The ruling considers an in-specie contribution to be made in conjunction with the purchase of an asset to be possible provided the sales contract makes it clear that the fund is only buying part of the asset – $670,000 for 67 per cent of the asset,” he explained. 

“A separate in-specie contribution – $330,000 for 33 per cent of the asset – of the remaining interest could occur on the same day, by the member providing a separate transfer document. The transaction now involves two entirely separate interests and is quite in order.”