The market value substitution rules as outlined in section 112-20 of the Income Tax Assessment Act 1997 will not allow an SMSF to be exempt from the new non-arm’s-length income (NALI) amendments contained in the Treasury Laws Amendment (2018 Superannuation Measures No 1) Bill 2019, a sector technical expert has said.
“Regardless of whether the market [value] substitution rules apply or not to an asset that was maybe transferred in [to an SMSF] at a lower value, the NALI rules here are still going to apply,” Smarter SMSF chief executive Aaron Dunn said.
“[This is] because what has happened is [the trustees] haven’t entered into the arrangement on commercial terms and therefore while the market [value] substitution rules will increase the cost base of that asset, we would still look to apply the non-arm’s-length income rules to both the ordinary income and the statutory income of the fund.”
Dunn pointed out that while the application of the market valuation substitution rule would not allow an SMSF to escape the NALI provisions, there was still a small positive outcome that could result.
“When we look at the capital gain [on the asset in question] having applied the market [value] substitution rules that may have increased the cost base can still apply so that any capital gain on disposal would ultimately be reduced as a result of the application of those market substitution rules,” he said.
The market value substitution rules dictate an asset will be revalued to reflect its market price as an asset within the SMSF regardless of what the actual purchase price associated with the transaction was.
The ATO has to see evidence of “real bargaining” in place to ensure a proper arm’s-length dealing took place when the asset for the fund was acquired, he said.