Australian property owners and super fund trustees are being warned about the significant tax consequences that can arise from transactions that aren't conducted at arm's length. Recent reader questions to financial expert Nick Bruining highlight the confusion surrounding these complex arrangements and how the Australian Taxation Office views them.
What Exactly is a Not at Arm's Length Transaction?
When a property transaction occurs between parties who have a pre-existing relationship, the ATO may scrutinise whether the deal reflects true market value. Common scenarios include sales between family members, business associates, or related companies where the price doesn't match what unrelated parties would agree upon in an open market.
As financial commentator Nick Bruining explains, these transactions become particularly problematic when they involve self-managed super funds (SMSFs) or when capital gains tax considerations come into play. The core issue revolves around whether both parties are acting in their own independent interests without any special relationship influencing the terms.
ATO Scrutiny and Super Fund Implications
The Australian Taxation Office takes a particularly dim view of non-arm's length transactions involving superannuation funds. If your SMSF acquires an asset from a related party at below market value, the ATO can deem the entire arrangement non-compliant with superannuation law.
This could result in severe penalties, including the fund losing its complying status and facing additional taxes. Similarly, if a fund sells an asset to a related party at an inflated price, the same compliance issues apply.
Bruining emphasises that the rules exist to prevent people from using their super funds as tax-effective vehicles for shifting wealth between related parties. The legislation is designed to ensure that super funds operate solely for the genuine retirement benefit purposes of their members.
Practical Examples and Reader Questions
One common scenario involves parents selling property to their children at a discounted price. While this might seem like generous family assistance, the tax implications can be substantial for both parties.
For the seller, capital gains tax may still be calculated based on the property's market value rather than the actual sale price. This means you could face a tax bill on 'profit' you never actually received.
For the buyer, if they later sell the property, their cost base for capital gains purposes might be the discounted price they paid rather than the true market value at acquisition. This could result in a higher taxable gain when they eventually dispose of the asset.
Bruining advises that anyone considering such transactions should obtain independent valuations and seek professional tax advice before proceeding. Documentation becomes crucial in demonstrating to the ATO that the transaction was conducted properly, even between related parties.
The rules extend beyond simple property sales to include rental arrangements, loan agreements, and any other financial dealings between parties who aren't dealing at arm's length. Getting it wrong can lead to years of compliance headaches and unexpected tax liabilities.
