EXAMPLE – Asset purchased for less than market value and no in specie contribution made
During the 2019 income year, Keri, as trustee of her SMSF, purchased ASX listed shares from a related party for $250,000. The market value of the shares at the time of purchase was $500,000. The terms of the agreement specify the purchase price of the shares as $250,000, rather than $500,000. Therefore, according to the ATO in LCR 2019/D3, the arrangement did not involve an in-specie contribution being made to the SMSF (even if the fund recognises the balance as an in-specie contribution and credits the member’s account accordingly).
The non-arm's length dealing between Keri's SMSF and the related party amounts to a scheme, which has resulted in her SMSF incurring capital expenditure that was less than would otherwise be expected if those parties were dealing with each other at arm's length in relation to the scheme. In the ATO’s view, the capital expenditure incurred to purchase the shares will be considered non-arm’s length expenditure. As a result:
- any dividend income derived by the superannuation fund from the shares will be NALI; and
- any capital gain that might arise from a subsequent CGT event happening in relation to the shares (e.g., the disposal of the shares) will be NALI.