While SMSFs are permitted to acquire shares in a related company as long as it doesn’t exceed 5 per cent of the assets in the fund, Colonial First State executive manager Craig Day said they need to be acquired at market value.
The timing of when the shares actually transfer, Mr Day explained, is therefore very important.
Taxation ruling 2010/1 states that once the share registry is updated or the fund has procured all the documents necessary to procure legal possession, that is when the contribution is considered to have taken place, Mr Day explained.
“So, once I’ve got all the documents I would need to actually enforce ownership, that’s transfer of beneficial ownership,” he told delegates at the SMSF Association Technical Day last week.
“The ATO will accept that if that happens before the time you update the share registry, then that’s the time of the contribution. You need to evidence it, but that’s the time of the contribution.”
Mr Day gave an example of an SMSF that acquires $100,000 worth of shares in a private company. The transfer forms are executed on 10 January, he said, but the share registry isn’t updated until 1 March until after the general meeting. The SMSF trustee then sells the shares on 15 January 2020.
“Now in this situation, those shares wouldn’t have actually transferred until 1 March, because the other shareholders had to approve the acquisition first,” he explained.
“So, because the acquisition hadn’t been approved [until that point], the fund didn’t have beneficial ownership because it didn’t have the right to ownership.”
The timing of the transfer, he said, will also have implications for CGT.
Given that this acquisition would fall under CGT event E2 which relates to the transfer of assets into a trust, the CGT event will occur on the date of the transfer, he explained.
This would mean that the fund misses out on CGT discount of one-third, because the relevant asset had been owned for less than 12 months.
“So, if you’re dealing with related companies and trusts, have a look at the rules in the company constitution because it’s not uncommon to see those kinds of rules in private companies and trusts,” he cautioned.
“Be aware that the timing of when you thought you acquired them for CGT purposes may not be that time, it might be later.”