Most people contribute to their super fund using cash. However, unlike other super funds, self managed super funds (SMSFs) give you the ability make contributions using assets rather than cash. These types of transactions are known as ‘in-specie’ transfers.
There are a number of benefits to transferring assets you hold personally into your SMSF, but there are also some common traps that often catch trustees off guard. Let’s run over these now. But first, I’ll cover off some basics.
The rules
The amount of an in-specie contribution is determined by the market value of the asset at the time the contribution is received by the fund.
As a general rule, SMSF trustees can’t buy assets from related parties, which is an extensive term that includes you and your family members. However, there are five exceptions to this rule, provided the acquisition is at market value and completed at arm’s length.
- Listed securities
Any share or other instrument listed for quotation on the Australian Stock Exchange or other approved exchange. - Business real property
Property used wholly and exclusively in one or more business. - Investments in a widely held trust (such as managed funds)
Where 20 or more unit holders hold at least 75% of the rights to capital and income of the trust. - Term deposits
Term and other deposits with an approved deposit institution such as a bank. - In-house-assets
A loan to or an investment in a related party of the SMSF, an investment in a related trust of the SMSF, or an asset subject to lease or lease agreement between the SMSF trustee and related party. The market value of the in-house assets can’t exceed 5% of the total market value of assets held by the fund.
The benefits
Cost savings: In-specie transfers have the benefit of potential savings on transaction costs. There are no additional brokerage costs because the shares are transferred off-market. Also, given current stock market volatility, there is no risk of missing out on market movements when shares are transferred because the SMSF remains invested in the market throughout the transfer.
Tax advantages: Contributing the asset into the SMSF allows the reduction or elimination (if the member is in pension phase) of the tax payable on future investment earnings. This is because SMSF income is taxed at 15% (and capital gains tax (CGT) is taxed at 10% for investments held for at least 12 months) instead of the individual’s marginal tax rate, which is usually higher.
Tax deduction: If an individual is entitled to claim a tax deduction for personal contributions (which count towards the concessional contributions cap), this will apply to in-specie contributions as well. This deduction may help offset any CGT that is triggered on the transfer (see below). Alternatively, it will count as a non-concessional contribution. Either way, the contribution will be subject to the relevant contribution caps.
Beware the traps
Breaking your cap: Just like cash contributions, in-specie contributions are subject to the same restrictions. Exceeding contributions caps will result in excess contributions tax. Also, age related restrictions will determine if a contribution can be made, and any conditions that must be met, such as the work test.
Capital gains tax: An in-specie contribution is a CGT event as the transfer is a disposal due to a change of ownership. A capital gain or loss may be made from the CGT event according to the usual CGT provisions that apply to that asset. The proceeds are deemed to be the market value of the asset at the time of the CGT event. Further, stamp duty and goods and services tax (GST) may be payable depending on the transferred asset, the state it’s located in, and the entity involved in the transfer.
Valuations: If the asset you’re transferring isn’t traded on an active underlying market, like shares on the ASX, a market valuation will be needed. It can be undertaken by either a qualified valuer or a person without formal qualifications. However, the valuation must be bases on reasonably objective and supportable data. A qualified valuer should be used where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex or difficult.
Wrong assets: It is important to understand which assets can be contributed in-specie to a SMSF. Strictly, residential investment property or private company shares can’t be transferred to the SMSF. These aren’t covered by the above exceptions. Violating this rule may have adverse consequences to the SMSF and the trustees. Importantly, ensure the trust deed allows in-specie contributions.
Watch out for these changes
The Government proposed to ban on- and off-market (i.e., in-specie) share transfers for SMSFs from July 2012, but this has been deferred until July 2013.
The concern with off-market transfers centres around price manipulation of the transfer, as the dates which appear on the off-market transfer forms can be chosen depending on the ‘best outcome’ scenario.
However, with numerous issues still to nut out, the ruling is yet to be finalised, which gives the industry more time to lobby the government to discard the ban altogether.
The main issue the government faces is that Corporations Law prohibits ‘wash trades’, which involves selling a share with the intention of buying it back on the market. By banning off-market transfers, a trustee would fall into this category in order to get the shares into their SMSF, which may impose serious penalties.
More suitable solutions are being put forward by industry experts, including more rigorous legislative controls around the time when off-market transfer forms are received by registries.
We eagerly await the outcome.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
