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I've come across something I've not seen before - an SMSF purchased 3 parcels of shares on 30/6/2020 from the member. Two of them totaled roughly $9000 combined, the third was a parcel worth $40,000. I have a signed off-market share transfer form dated 30/6/2020 listing all three parcels. All shares were purchased at market value and are shown in the accounts as assets of the fund in 2020.
The bank statements show that the fund paid the member for the two smaller parcels on 30/6/2020. The payment for the third is allocated to a sundry creditor account in the 2020 financials and $40,000 was paid on 14/7/20. I have not received confirmation of when the transfer paperwork was lodged with Commsec however I'm under the impression it was not lodged until after 30/6 as all three registries show additions to SMSF holdings on 30/7/2020.
I advised the accountant that a contravention report would have to be lodged as there is a breach of s109 due to the transaction not being conducted at arm's length terms. I received the following as a response:
"I’m going to need further clarification on this as this is the first time I’ve come across this concept. Can you send through something (or provide links) that has been published (ATO, professional bodies, etc.) that goes through this? SMSFs buy assets all the time where they don’t have the $$$ in the bank account at the time they enter into the transaction - contract date vs settlement date. I do it all the time with my own SMSF and Commsec are still willing to enter into the transaction even though the SMSF’s CDMA account doesn’t have enough $$$ in it at the time – I just transfer the cash in in time for settlement. LRBA purchases are also an example of this – a 3rd party vendor doesn’t refuse to sell a property because the purchaser doesn’t have the settlement cash sitting in their bank account at the time the contract is signed (in reality it is actually none of their business)"
Am I in the wrong here? Any help would be greatly appreciated
Thanks very much for your input. I would like to clarify one part of your response where you say 'transfer ownership of an asset prior to it being paid for' - the shares were not transferred using registries until July 30th 2020, the accounts show them as fund assets at 30/6/20 but there was no transfer using Commsec until after the final payment was made.
Does this change your view?
Hi Michael,
I agree that you could argue a breach of section 109 as not normally an arm's length transaction to transfer ownership of an asset (such as shares) prior to it being paid for.
It could also be argued that the Fund has in effect borrowed to purchase the shares and be in breach of section 67. Section 67 does allow a Fund to borrow to settle share purchases if not more than 7 days and not more than 10% of the assets of the Fund.
There may be differing views but as the shares have been paid for my view would be to raise it as a management letter item that such a transaction could lead to a breach of the arm's length or borrowing rules. There is also the risk that the transfer of the shares could be treated as a contribution to the Fund.
The non arm's length issue could also raise the non-arms's length income provisions.
Thanks
SMSF AAA