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It may sound like an alien abduction, but in specie transfers have a more down-to-earth meaning in superannuation parlance.
Most super fund members are familiar with the process of making contributions to their super account. However, they may be less familiar with the process of transferring an asset such as property or shares in or out of their fund without any money changing hands.
In specie transfers (also known as off-market transfers) are transfers of assets in and out of super funds, rather than transfers of money. In specie is a Latin phrase meaning ‘actual form’.
As with all things super, strict rules apply. For one thing, any in specie asset transfers must be done at current market value.
In specie transfers are a strategy more commonly used in self-managed super funds (SMSFs) than public super funds. In this article, we focus solely on in specie transfers relating to SMSFs.
What kind of in specie transfers are allowed?
Two broad types of assets can be transferred in specie under Australian superannuation legislation:
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- 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 note that an SMSF can’t acquire in specie assets from any related parties of its fund members, such as family members or business partners.
How do they work?
In specie asset transfers can be made into or out of an SMSF. We’ll 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 involved in securities trading. The SMSF should be listed on this form as the purchaser of the shares being transferred.
- 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 of 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 transfers can also be made from 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 (such as when they have reached their preservation age and/or have met a super condition of release), an Off-Market Transfer form or commercial property contract of sale must 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 make an in specie transfer?
Potential tax savings are usually the motivation for in specie asset transfers.
For example, if an SMSF member in a high marginal tax bracket has personal assets generating income, doing an in specie transfer to get the asset into the tax-friendly super environment may be a sound financial strategy.
Before you act, 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 (before tax) or non-concessional (after tax) contribution.
Concessional contributions are taxed at 15% in Australia, up to certain contributions limits. Non-concessional contributions aren’t 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.
However, if the SMSF member chooses to treat the in specie asset transfer as a sale to their fund, 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 are the drawbacks?
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, so members need to be sure they won’t need to access their transferring assets before then.
It’s also worth remembering that 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. 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. As the asset is deemed to have been sold because there’s been a change of ownership, the transfer is 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 to 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 to their personal taxable income in the year they make the transfer (if they owned the asset for more than 12 months).
On the plus side, no CGT is payable by the SMSF if the transferred asset is subsequently sold after the member has started an account-based pension.
In specie asset transfers in and out of superannuation are possible for ASX-listed securities and commercial property. There are pros and cons involved, so it’s worth seeking 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.