SMSF practitioners should exercise caution with strategies involving transferring life estate interests to an SMSF with the ATO looking at them “in every possible detail”, according to one industry lawyer.
DBA Lawyers director Daniel Butler noted the steadily increasing publicity around SMSF members transferring life estate in business real property (BRP) by way of an in kind or in specie contributions to SMSFs is potentially problematic for those who don’t understand the risks they are entering into.
“Most transfers of real estate affect a transfer of the ‘fee simple’ estate. However, a transfer of a life estate interest, on the other hand, entitles the life tenant to possession of the property together with any income from that property throughout the period of the life tenancy,” Mr Butler explained.
“It is important to note that the life tenant is only entitled to the possession and income from the property throughout the life of the person’s life – ie, the life in being, who is the person who’s life expectancy is relied on to determine the life estate interest,” he said.
“Note that a life estate interest can only be acquired from a member or related party of the property qualifies as BRP as an interest in residential property cannot be acquired from a member or related party under section 66 of the [Commonwealth] Superannuation Industry (Supervision) Act 1993,” he said.
Mr Butler said his recent dealings with the ATO suggest this strategy is been closely scrutinised from a regulatory and a tax perspective, despite a number of positive private binding rulings (PBRs).
Mr Butler also believes the ATO is examining whether one or more of the anti-avoidance provisions will be applied.
“Extreme care is needed to ensure that each and every regulatory and tax provision is satisfied and appropriate evidence is retained. The grounds for any tax saving should also be appropriately addressed as the ATO may seek to apply the non-arm’s length income provision in section 295-550 of the ITAA 1997 and/or the general anti-avoidance provision in Part IVA of the [Commonwealth] Income Tax Assessment Act 1936,” Mr Butler said.
“Those contemplating this strategy should therefore carefully consider whether they should seek a PBR on the tax issues including the potential application of the anti-avoidance provisions."
He added: “Taxpayers that proceed without a favourable ruling are subject to the risk of the ATO scrutinising the transaction and making adjustments.”