There are myriad rules applying to superannuation. If this didn't make the job of being the trustee of a self-managed super fund hard enough, the rules are contained in two different pieces of legislation: the Superannuation Industry (Supervision) Act and the Income Tax Assessment Act.
Despite the complexity of these rules, trustees of an SMSF can avoid major breaches and penalties by being aware of the three areas where breaches carry the highest penalties. They are of the rules relating to contributions, accessing superannuation, and what a super fund can invest in.
The rules about contributions and allowable investments for SMSFs combine when it comes to making in specie contributions to a super fund. The most common investments where this occurs are shares and property.
For shares, the jury is still out on whether the proposed ban on in specie transfers will ever come into effect. If the Australian Securities and Investments Commission regulations that forbid the buying and selling of the share in effectively the one transaction are amended, so that the ban on in specie share transfers can be implemented, it could be a blessing for trustees of SMSFs.
The ability to transfer shares in specie into an SMSF appears to be attractive because of the saving on stockbroking fees. With online stockbroking fees often less than $30, and the amount of paperwork and time that must be spent in executing an in specie transfer, the ability for trustees to sell shares as individuals to the super fund without breaching ASIC's share trading rules will be a blessing.
Also, by buying and selling the shares in the market, all of the documentation needed to support the transfer is automatically produced. When in specie transfers of shares occurs, trustees must produce documentation to support the date of the transfer and the value placed on the shares.
At present there is no plan to ban in specie transfers of property into an SMSF. Under superannuation investment rules, only business property can be purchased by an SMSF from members. The transfer of residential property into an SMSF is banned.
Property transferred into an SMSF must have a market value placed on it at the time of the transfer. Problems have occurred for some people transferring property into an SMSF when the market value exceeds the contribution limits. For the 2013 financial year, an individual will pay penalty tax of 46.5 per cent on the excess if a property is valued at more than $475,000.
When it comes to an in specie transfer of property out of a superannuation fund, the rules relating to accessing superannuation must be considered.
Before a member can receive a payment in cash or in specie, they must have met a condition of release. The most common conditions of release are for retirement and commencing a pension.
Members receiving a pension from a super fund must have this paid in cash and cannot receive the pension as a specie transfer. This means the only time that property can be transferred in specie out of a superannuation fund is as part of a lump sum retirement benefit.
Just as is the case with transfers of property into a super fund, a valuation must be obtained at the time a property is transferred out. There is nothing in the superannuation rules that stops a super fund buying a residential property from a non-associated party and subsequently making a lump sum retirement payment to a member as an in specie transfer of the property.
Frequently Asked Questions about this Article…
What key laws and rules do SMSF trustees need to follow when managing a self-managed super fund?
Trustees of a self-managed super fund (SMSF) must follow complex superannuation rules contained in the Superannuation Industry (Supervision) Act (SIS) and the Income Tax Assessment Act. The areas that carry the highest penalties are complying with contribution rules, following the rules for accessing superannuation (conditions of release), and obeying super fund investment rules.
What is an in specie contribution to an SMSF and which assets are commonly transferred in specie?
An in specie contribution is when assets (rather than cash) are transferred into a super fund. The most common in specie contributions into SMSFs are shares and property, where the actual asset is moved into the fund instead of selling it and contributing cash.
Are in specie share transfers into an SMSF allowed and is there any risk of a future ban?
In specie share transfers are currently a feature of SMSFs, but the article notes there is uncertainty about a proposed ban. Implementation would depend on changes to Australian Securities and Investments Commission (ASIC) regulations that currently affect share trading rules. The outcome is unclear, so trustees should monitor developments.
What are the advantages and documentation requirements of transferring shares in specie into an SMSF?
A key advantage of in specie share transfers is potential savings on stockbroking fees. However, in specie transfers require trustees to produce documentation to support the transfer date and the value placed on the shares. By contrast, buying or selling shares in the market automatically generates the paperwork that supports price and timing.
Can residential property be transferred into an SMSF from a member?
No. Under superannuation investment rules, transfers of residential property from members into an SMSF are banned. An SMSF may only purchase business property from members; residential property transfers from members are not permitted.
What valuation and contribution cap issues should I watch for when transferring property into an SMSF?
Any property transferred into an SMSF must have a market value placed on it at the time of transfer. Problems arise if that market value causes the contribution to exceed contribution limits. For example, the article notes that for the 2013 financial year an individual faced a penalty tax of 46.5% on the excess if a transferred property was valued at more than $475,000.
Can SMSF members receive pension payments or property as in specie payments when accessing their super?
Members must meet a condition of release before receiving payments from an SMSF. If a member is receiving a pension, the pension must be paid in cash — pensions cannot be provided as in specie transfers. Property can only be transferred in specie out of a fund as part of a lump-sum retirement benefit, not as an ongoing pension payment.
Is it possible for an SMSF to buy residential property from a non-associated party and later transfer it to a member as an in specie lump sum?
Yes. The article states there is nothing in the superannuation rules that prevents an SMSF from buying residential property from a non-associated party and then making a lump-sum retirement payment to a member as an in specie transfer. As with other in specie transfers, a valuation must be obtained at the time the property is transferred out of the fund and the member must meet a condition of release.
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