The amendments mean that even if the income a fund receives is on commercial arm’s-length terms, if the fund has not incurred an expense in relation to that income on commercial arm’s-length terms, the fund is still required to tax all the income as non-arm’s length income.

BDO partner, superannuation, Mark Wilkinson said one of the potential traps with the amendments, particularly following the ATO’s draft ruling, is with in-specie contributions and the documentation required with this.

“[Where] an asset is coming into the fund, you must have documentation that states that it’s going to be treated as a concessional or non-concessional contribution,” Mr Wilkinson explained.

“Otherwise, the ATO has said in that draft ruling that they will treat it as a non-arm’s length transaction.”

Mr Wilkinson referred to example 3 in the draft ruling which explains the outcomes in relation to non-arm’s length income where there is purchase of shares made from a related party that is less than market value and where there is no in-specie contribution.

The ATO notes in the example that the non-arm’s length dealing between the SMSF and the related entity amounts to a scheme, which results in the superannuation fund 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. The capital expenditure is incurred in gaining or producing dividend income.

“Any dividend income derived by the superannuation fund from the shares will be NALI,” the example states.

“The non-arm’s length expenditure incurred in acquiring the shares will also result in any capital gain that might arise from a subsequent CGT event happening in relation to the shares (such as a disposal of the shares) being NALI.”

Mr Wilkinson explained: “If you were transferring a property worth half a million dollars and your non-concessional contribution cap is $300,000 and you only pay $200,000 for it, what the Tax Office is saying in that draft ruling is that you have to have documentation that clearly demonstrates that, yes, I’m paying $200,000 and I’m treating the other $300,000 as a non-concessional.

“You can’t just deal with the acquisition of the asset at year-end as if that’s what’s happened without documentation being put in place.”

This type of documentation hasn’t been done in a lot of cases in the past, he said, and some SMSF practitioners or trustees may not be aware that the ATO is now expecting this.

“They might think, ‘Well, we’ve got the non-concessional cap and we’re going to pay this much and that equals the market value, so it’s all okay’ — well, it might not be, according to the ATO’s example,” he stressed.