Scott Hay-Bartlem, partner at Cooper Grace Ward Lawyers, speaking at the firm’s Annual Advisers’ Conference, said it’s important to first understand the definition of a contribution, which has been somewhat confusing over the past few years with changes to the NALI/E legislation.
“Back in 2010 the ATO said if you transfer ‘stuff’ into your fund at undervalue, then that was a contribution, but now with all the NALI changes that have been happening over the last couple of years, the ATO has amended that to say maybe it’s not a contribution, maybe it’s NALI,” Hay-Bartlem said.
“It’s important to be able to distinguish that if you transfer a piece of property worth $1 million in for $500,000 then is the $500,000 going to be a contribution of some sort. You may say you have enough members that you can cover the non-concessional contribution caps, or is it a transfer in for undervalue, which means any single piece of income from that property forever is now taxed as NALI at the top marginal tax rate, including your capital gain when you sell. That’s a really important distinction that the ATO has made more recently.”
Clinton Jackson, partner at Cooper Grace Ward Lawyers, said the Tax Office has maintained that this sort of transfer has been a contribution, and there have been no underpayments because technically the fund has received something for value.
“However, the ATO is now moving [that this type of transaction] is more towards being NALI, which creates a tax issue sitting in a super fund. For example, if you transfer business real property into a super fund, the value of which is $1 million, and pay $600,000, what is the remaining $400,000 classified as?” Hay-Bartlem said.
“At the point in time you do this, you need to figure out what that $400,000 is. Don’t come back in five years when the ATO comes to take a look and say you don’t know what it was.”
If the trustees intend that to be a contribution, that needs to be documented in the contract [of purchase], or in another document.
“What I see is a standard real estate contract saying the property is worth $1 million and the super fund is paying $600,000, but that is the wrong thing to do,” Jackson said.
“The only ‘wronger’ thing is to then put a loan agreement in place and say the super fund has a loan from the family trust. But you don’t want to do nothing. You can have that as a contribution, but you need some documents where you confirm it’s a contribution, how it’s a contribution, why it’s a contribution, and for whom it’s a contribution.”
If the documentation is not done correctly, he said, it will be classified as NALI.
Jackson added that it is preferable to ensure that the transfer is documented in the contract, as it is a clear legal documentation of the transaction that sets out how the $1 million will be dealt with.
“[It sets out] that you are going to pay $600,000 as cash and treat $400,000 as a contribution,” Jackson said.
“Sometimes it’s not possible to do that because you might have a contract between different entities, or you might want it to be a contribution for two members and not one, so you might need to do other documents. But you need to do those contemporaneously when you actually do the contract.”
The fund can borrow money from a member and use this to pay for part of the property, the price of the property and the interest rate must be at arm’s length market. With the right timing for the transaction the balance of the purchase price can be a contribution. In June a Non concessional Contribution at $120,000 can be offset against a further portion of the price and then in July with Bring Forward a Non concessional Contribution at $360,000 can be offset against a further portion of the price. So, for a purchase at $1 million a contract can be signed in June and $120,000 deposit paid by offset against an initial NCC with the Net Amount therefore being $0. Then the purchase is settled in July with a further $360,000 NCC plus a secured loan from the relevant member at $570,000 covering the balance of the price $520,000 plus $50,000 for stamp duty and costs. An LRBA loan at 57% LVR and market interest rate would be compliant and the relevant contribution to finance the balance of the purchase would be within contribution limits.