In Specie Contribution Trap
Paragraphs 27 to 30 of LCR 2021/2 have important ramifications to a relatively standard SMSF practice.
It is not unusual for an asset to be acquired from a related party partly by way of a purchase for cash and partly by way of an in specie contribution. An example would be the acquisition of a $1m business real property from a member where the fund pays the member $670k and regards the remaining $330k 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.
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).
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 – $670k for 67% of the asset. A separate in specie contribution – $330k for 33% 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.