A primer on in-specie transfers

If you’re an SMSF trustee you’ve probably heard about in-specie transfers. Richard Livingston and Liam Shorte explain what they are and how to do them.

Key Points

  • In-specie transfers are effectively ‘gifts’ of assets
  • Doing them can avoid multiple transactions and associated costs
  • We run through the mechanics and highlight specific strategies

If you have an SMSF, you’ll be familiar with making contributions to it, or distributions out of it. Typically, these are done as cash payments, but sometimes an in-specie transfer is more preferable.

Trouble is, most people don’t know what they are or how to use them to their benefit. That’s something we’re about to fix.

In-specie transfer

An in-specie contribution or distribution is a bit like a ‘gift’ (of the assets being transferred). For example, if you want to make a contribution to your SMSF, you can transfer listed shares (currently held in your name) instead of paying cash. A distribution can be paid by the fund by transferring assets it owns to a member.

The difference between an in-specie transfer and a normal sale of assets is that, in the latter, there is a sale price, with cash changing hands in return for the transfer.

The main reason for doing an in-specie transfer is that it eliminates the extra transactions necessary to make a cash payment. If you hold a portfolio of listed shares and want to transfer them to your SMSF you can either:

  1. Make a cash contribution to the fund (which might involve drawing down on a home loan or other loan facility) and then sell the shares to the fund, in return for the cash you have just contributed; or
     
  2. Sell the shares on-market and use the proceeds to make a cash contribution to the fund. The fund can then purchase shares on-market (with you and the fund both incurring brokerage and possibly a bid/offer (or buy/sell) spread); or
     
  3. Transfer the shares directly to the fund for no consideration (an in-specie transfer).

If you’re dealing with an asset like a commercial building, the first two approaches can be even more problematic. The third option (in-specie transfer) is typically simpler and less costly.

We’ll look at for the process of doing an in-specie transfer in a moment. First, let’s tackle the key super rules you need to keep in mind when doing them.

In-specie transfers and super

SMSFs are prohibited from buying assets from members (and related parties) unless they fall into one of the exceptions: listed securities, widely held managed fund units and business real property. (There’s also an exception for ‘in-house assets’ but we don’t recommend relying on it because changes in values can cause you to breach the in-house assets test down the track).

The other key rules are:

  1. Contributions caps. The value of any in-specie transfer from a member to the fund is counted as a contribution and should be minuted by the trustees as being either a concessional or non-concessional contribution. The normal ‘bring forward rule’ both apply. Remember to take account of any cash or employer contributions (including salary sacrifice) and, if you’re making concessional contributions (that you intend to claim a tax deduction for) don’t forget to provide a binding death benefit nomination in place, their super death benefit is often paid as a lump sum to either their beneficiaries or their estate.

    Paying the lump sum by way of in-specie transfer avoids the need to sell the assets of the fund. If the beneficiaries are death benefit dependants (for instance, spouse, ex-spouse or children under 18) then the transfer is tax-free. The transfer should also be exempt from stamp duty or entitled to a concessional rate (again, this varies by state).

    An in-specie transfer provides a way for fund assets to become assets of the member’s beneficiaries without extra taxes or multiple layers of transaction costs.

    Action points: The treatment of death benefit payments and the rules surrounding them is extremely complicated. In some cases it may be better to pay an income stream to beneficiaries, rather than a lump sum, or make the payment to a testamentary trust. You can find more information at the Tax Office website, but we strongly recommend seeking personal advice on estate planning to ensure the best outcome.

    In a nutshell

    In-specie transfers are an important part of superannuation planning because they reduce transaction costs (sometimes substantially) and often simplify matters. We hope you now have an understanding of when they’re useful and how to do them, but if you have more questions we’re only a Q&A away.

    Richard Livingston and Liam Shorte are founders of Eviser.

     

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