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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.
Self-managed super fund (SMSF) trustees are no doubt familiar with the process of making contributions to their super account. However, you may be less familiar with the process of transferring an asset such as property or shares in or out of your fund without any money changing hands.
In specie transfers (also known as off-market transfers) are transfers of non-monetary assets in and out of super funds without the need to convert them into cash. In specie is a Latin phrase meaning ‘in the 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. There may also be an impact on your contribution caps and tax position.
While most super funds allow in specie contributions, it is a strategy more commonly used by 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?
Generally, you must not intentionally acquire assets (including in specie contributions) from related parties of your fund such as family members of business partners. However, there are some exceptions to this rule.
The only types of assets that can be acquired as an in specie transfer under Australian superannuation legislation are:
- Shares and other listed securities on an approved stock exchange such as the Australian Securities Exchange (ASX)
- Managed funds
- Business real property (land and buildings used purely for business)
These restrictions for in specie transfers only apply when the fund acquires assets, not when assets are transferred to members to satisfy a benefit payment.
Lump sum benefit payments to members (but not pension payments) may be made via an in specie transfer of assets out of the fund without restriction on the type of asset that is transferred.
How do they work?
In specie asset transfers can be made into or out of an SMSF. In either case, they must be at market value.
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. You will also need to lodge an Off-Market Transfer form to transfer managed funds, but the form must be lodged with the fund manager directly.
- 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 the asset being transferred is 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 concessionally taxed super environment may be a sound financial strategy. Instead of paying personal income tax of up to 45% outside super, your super fund would pay tax of 15% on income generated or no tax in retirement phase.
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 transfers an asset into their SMSF, they can choose to treat it either as a contribution or an asset sale.
If you choose to treat an in specie asset transfer as a contribution, you 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 (plus an additional 15% if your annual income including concessional super contributions exceeds $250,000), up to certain contributions limits, currently $27,500 per financial year. Non-concessional contributions aren’t taxed, but there are also limits to how much you can contribute each year, currently $110,000 per year or $330,000 for members aged under 75 using a bring-forward arrangement.
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 your SMSF effectively removes your access to the asset until you reach your preservation age and satisfy a condition of release. This is an important consideration, so you need to be sure you won’t need access to any assets you transfer before then.
It’s also worth remembering that any business 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. Transfers of shares and other securities don’t attract stamp duty.
What about capital gains tax (CGT)?
Tax is likely to be another important consideration. In specie asset transfers have CGT implications. When there’s a change of ownership an asset is deemed to have been sold, so the transfer is subject to capital gains tax.
For example, if a member has made a capital gain on an in specie asset transfer 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, or
- 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.
If you are transferring the asset at a loss, then you retain that loss on your personal income tax return, which can then be used to offset future capital gains.
On the plus side, no CGT is payable by the SMSF if the transferred asset is subsequently sold after the member retires and starts an account-based pension.
Even so, given the potential costs and time involved in transferring assets into your SMSF, it’s likely you would only consider using an in specie strategy if you expect to hold the asset for the long term.
In specie asset transfers in and out of super are possible for listed securities and business real 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.