- What kind of in specie transfers are allowed?
- How do they work?
- Why might you want to do an in specie transfer?
- How are in specie contributions taxed?
- What do you need to be careful of with in specie transfers?
- What about capital gains tax (CGT)?
- The bottom line
In specie superannuation transfers (also known as off market transfers) are transfers of assets in and out of super funds, rather than actual transfers of money. In specie is a Latin phrase meaning “actual form”.
An in specie transfer to or from a super fund is therefore the process of transferring an asset in or out of the fund without any money changing hands. Any in specie asset transfers must be done at current market value.
In specie asset transfers are a strategy more commonly used in self-managed super funds (SMSFs) than public super funds. Different public super funds will have differing rules and restrictions governing whether or not they allow these types of transfers.
In this article, we’ll look at in specie asset transfers relating to SMSFs.
What kind of in specie transfers are allowed?
Two broad types of assets are allowed to be transferred in specie under Australian superannuation legislation:
- Australian Securities Exchange (ASX)-listed securities (e.g. shares in public companies).
- Commercial property (i.e. premises used purely for business purposes).
It’s important to understand that an SMSF can’t acquire in specie assets from any related parties of its fund members (e.g. family members).
How do they work?
In specie asset transfers can be made into or out of an SMSF. We will look at transferring these assets into an SMSF first.
Transferring in specie assets into an SMSF
SMSF members can make an in specie asset transfer to their fund by:
- Completing and lodging an Off-Market Transfer form for the transfer of ASX-listed securities. This form is available from any financial institution that’s involved in securities trading. The SMSF should be listed on this form as the purchaser of the transferring asset.
- Executing a contract of sale for commercial property transfers. The SMSF should be listed as the purchaser of the property on this contract. SMSF members doing this type pf in specie transfer should contact a solicitor to draw up the paperwork and lodge the required documents with their State or Territory’s Revenue Office.
Transferring in specie assets out of an SMSF
In specie assets transfers can also be made out of an SMSF. For example, when the SMSF is wound up. If a transferring asset is being paid out as a lump sum to the member (i.e. if they have reached their preservation age and have met a super condition of release), an Off-Market Transfer form or commercial property contract of sale will need to be completed showing the member as the purchaser. In specie transfer payments cannot be made as pensions, they must be paid as lump sums.
Alternatively, if the asset is being transferred to another super fund, that fund will need to be listed as the purchaser on either the Off-Market Transfer form or on the commercial property contract of sale.
Why might you want to do an in specie transfer?
Potential tax savings are usually the motivation for in specie asset transfers.
For example, if an SMSF member has personal assets that are generating income and they’re in a high marginal tax bracket, doing an in specie transfer to get the asset into the tax-friendly super environment may be a sound financial strategy. It’s best to seek professional advice to see if this would be appropriate for your individual financial circumstances and needs.
How are in specie contributions taxed?
When a member’s asset is transferred into their SMSF, they can choose to treat it either as a contribution or an asset sale.
If a member chooses to treat their in specie asset transfer as a contribution, they can also choose whether it will be a concessional (i.e. before tax) or non-concessional (i.e. after tax) contribution. Concessional contributions are taxed at the rate of 15% in Australia, up to certain contributions limits. Non-concessional contributions are not taxed, but there are also limits to how much you can contribute each year.
The value of the asset transferred as a contribution will be added to the SMSF member’s account balance.
If the SMSF member chooses to treat the in specie asset transfer as a sale to their SMSF, the value of the asset will be allocated proportionally to each member of the fund based on their ownership of the SMSF’s other assets at the time of the transfer.
What do you need to be careful of with in specie transfers?
It’s important to understand that an in specie asset transfer into an SMSF effectively removes member access to the asset until they reach their preservation age. This is an important consideration. Members therefore need to be sure that they won’t need to access their transferring assets before then.
In addition, any commercial property transfers will attract government stamp duty. The amount payable depends on the value of the property transferred and the stamp duty rate charged by the State or Territory government where the property is located. These rates vary across Australia. Share or security transfers however don’t attract stamp duty.
What about capital gains tax (CGT)?
This is another important consideration. In specie asset transfers have CGT implications. The asset is deemed to have been sold because there has been a change of ownership. There are therefore subject to capital gains tax.
For example, if a member has made a capital gain on transferring an in specie asset into their SMSF, they will need to:
- Add the full capital gain from the sale onto their personal taxable income in the year they make the transfer (if they owned the asset for less than 12 months).
- Add 50% of their capital gain onto their personal taxable income in the year they make the transfer (if they owned the asset for more than 12 months).
However, no CGT is payable by the SMSF is the asset that has been transferred is subsequently sold after the member has commenced an account-based pension.
In specie asset transfers in and out of superannuation are possible for ASX-listed securities and commercial property. It’s worthwhile to seek independent professional advice about whether an in specie asset transfer is appropriate for your personal financial circumstances. The information contained in this article is general in nature.