Transfer of an Asset from a Member to the SMSF
Members of a SMSF traditionally make contributions in cash. However it is possible for Members to make contributions of assets directly into the SMSF instead of cash. These types of contributions are called "in specie" contributions. Importantly only certain assets listed in the Super Laws can be transferred in specie by a Member. If the asset is not specifically listed in the Super Laws, it is illegal to transfer an asset owned by a Member into the SMSF.
Assets that can be transferred In Specie
The only assets currently allowed to be transferred to a SMSF from a Member (or an associate of an SMSF Member by blood or marriage or entity controlled by a Member) are as follows
- ASX Listed Securities
- Widely Held Managed Funds
- Business or Commercial Property
- Cash Based investments such as Bonds and Debentures.
Importantly whilst a SMSF can purchase Residential Property from a person who is not a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member), a SMSF cannot purchase Residential Property from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) even if the purchase is at market value. This is illegal!
Transferring ASX Listed Securities
To transfer ASX Listed Securities from your personal name to the name of the SMSF an Off Market Transfer Form must be completed and lodged. In the Off Market Transfer you will need to list the Purchaser of the Shares as your SMSF. You will not need to specifically state which Member the shares are being allocated to. This is done as part of the annual Checklist Process detailed below. The process to complete an Off Market Transfer is discussed in detail here.
Transferring Widely Held Managed Funds
To transfer Widely Held Managed Funds (e.g. MLC, AMP, Platinum etc.) from your personal name to the name of the SMSF, an Off Market Transfer Form must be completed and lodged with the Fund Manager directly. A generic Off Market Transfer Form can be found here. In the Off Market Transfer you will need to list the Purchaser of the Managed Funds as your SMSF. You will not need to specifically state which Member they are being allocated to. This is done as part of the annual Checklist Process detailed below.
Transferring Commercial Property
To transfer Commercial Property from your personal name to the name of the SMSF, you will need to execute a Contract of Sale and will need a solicitor to prepare the required documentation including lodging the transfer documents with the relevant State Revenue Office. You will need to list the Purchaser of the Commercial Property as your SMSF. You will not need to specifically state which Member the Commercial Property is being allocated to. This is done as part of the annual Checklist Process detailed below.
Transferring Residential Property
You must remember that it is illegal to transfer Residential Property from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member). So you should never contemplate this transfer as it will lead to significant penalties.
Transfers must be at Market Value
All In Specie Transfers of assets from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) must be transferred at Market Value. The Market Value must be clearly detailed in the Off Market Transfer Form prepared for the transfer of ASX Listed Securities or Managed Funds or in the event of Commercial Property in the Transfer Documentation. To the extent that the asset is transferred to the SMSF at a value under Market Value the transfer will be "deemed" to be at Market Value.
Treatment of In Specie Transfers within the SMSF
When you make an In Specie Transfer to a SMSF, it can be treated in one of two ways when it is received by the SMSF. It can be treated as either a Contribution or alternatively as an Asset Purchase by the SMSF. It is totally your choice which option is chosen! Each is discussed below.
Treating In Specie Transfer as a Contribution
As detailed above in the documentation to effect the asset transfer you will need to list the purchaser of the asset as your SMSF. At the end of the Financial Year we will forward to you a Checklist detailing if you wish the transfer to be treated as a contribution or an asset sale. If you elect the transfer to be treated as a contribution you will need to elect which Member will be allocated the contribution and the type of the contribution to be allocated, namely Non Concessional or Concessional. Once the election is made, the value of the asset (not the asset itself) will be allocated to the Member when preparing the annual compliance documents for the SMSF. The Eligibility Criteria and Contribution Limits will need to be carefully borne in mind under this option.
Treating In Specie Transfer as an Asset Sale
As detailed above in the documentation to effect the asset transfer you will need to list the purchaser of the asset as your SMSF. At the time of the transfer you can elect that the transfer be treated as a sale and the SMSF pay you the Market Value of the asset being transferred. In this case we will not record the asset transfer as a contribution. Under this scenario the value of the asset (not the asset itself) will be allocated on a proportional basis to each Member based on that Member's existing ownership of the SMSF at the time of the transfer, when preparing the annual compliance documents for the SMSF.
Consolidating investments outside your SMSF into your SMSF can produce significant tax savings over time. For example assume you have a Share Portfolio in your personal name valued at $300,000. Assuming you are on the top marginal tax rate you will pay up to 47% on the income and capital gains generated by the investment. Assuming income of 3% per annum this equates to around $4,500 in tax per annum payable on the income. Worse still, assuming the investment doubles every 10 years (a generally accepted investment principle) the capital gains tax bill on sale would be approximately $70,000.
Whilst you may not plan on selling the investment, eventually the investment will be sold even if by your beneficiaries after you die as the tax bill will not die with you. By transferring the Share Portfolio into your SMSF, the tax on the annual investment income will fall to $1,500 per year (a tax saving of $3,000 each year) and to $0 after you commence a Simple Account Based Pension (a tax saving of $4,500 each year). In addition there will be no tax on the capital gain in your SMSF if the shares are sold after you commence a Simple Account Based Pension. In the above example this can equate to a tax savings exceeding $100,000!
Catch Number 1: Assets Preserved until Retirement
Whilst there can be significant tax savings by transferring assets from your personal name to your SMSF, there are several catches which must be carefully considered. The first is that transferring assets to your SMSF "traps" the assets in the SMSF until you are at your preservation age. So whilst it may be tax advantageous to transfer assets to your SMSF you must ensure that it is money you will not require until at your preservation age.
Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.
|Date of birth
|Before 1 July 1960
|1 July 1960 – 30 June 1961
|1 July 1961 – 30 June 1962
|1 July 1962 – 30 June 1963
|1 July 1963 – 30 June 1964
|From 01 July 1964
Catch Number 2: Stamp Duty
Stamp Duty may be payable on Managed Funds and Commercial Property Transfers and should be carefully considered prior to transferring these assets to your SMSF. Accordingly you will need to contact the State Revenue Office or your solicitor to discuss the Stamp Duty implications associated with any transfer strategy where it involves Managed Funds or Commercial Property. There is no stamp duty on share transfers.
Catch Number 3: Capital Gains Tax
Because there is a change in ownership of the asset transferred (from you to the SMSF), the asset transferred is deemed to have been sold resulting in possible CGT implications on the transfer namely:
If the asset has been held for less than 12 months, any capital gain on the asset transferred will be realized and the full amount of the capital gain will be included in your personal taxable income.
If the asset has been held for more than 12 months, any capital gain on the asset transferred will be realized and 50% of the capital gain will be included in your personal taxable income.
Any capital loss on the asset transferred will be realized and will be included in your personal taxable income.
This means that to the extent there is a capital gain on the transfer of assets into your SMSF the capital gains tax cost needs to be considered before implementing this strategy. In some cases shares will have been held for many years and the capital gains will be significant. However this does not automatically mean that you should avoid this strategy for fear of paying some tax now.
Minimising Capital Gains Tax on Asset Transfers
Let's assume that you have held shares valued at $450,000 in your personal name and have an unrealized capital gain of $150,000. You are close to retirement and are keen to consolidate your personal investments into your SMSF with the knowledge that earnings and capital gains in the SMSF will be tax free when you commence a Pension.
If the shares are transferred whilst you are still working, and assuming you are on the top marginal tax rate, you will trigger a $150,000 capital gain. After applying the 50% CGT exemption, $75,000 will be taxable at the top tax rate of 47%. A tax bill of $35,250! Ouch!
If however you defer the transfer until the first year after you stop working and assuming you are under 65 you can dramatically alter the tax bill. This is because you will have no salary income in the year of the transfer and you also will be able to claim a tax deduction on the transfer (up to a maximum of $25,000). In the same example you can claim the maximum tax deduction on the contribution of $25,000 reducing the taxable capital gain to only $50,000. Tax on the transfer is reduced to only $12,547 (i.e. $3,750 on the $25,000 super contribution at a tax rate 15% and $8,797 on the $50,000 capital gain remaining in your personal name). This is a tax saving of around $22,700! If the capital gain is greater than $150,000 you can average the tax bill down by spreading the transfer over more than 1 year.
In the above example the Investor will enjoy tax free income on the $450,000 transferred into the SMSF as well as paying no tax on the capital growth on the investment once your SMSF is fully in Tax Free Retirement Pension Phase. Assuming that the investment generates 8% in income and realized capital gains per annum, the $40,000 will be tax free to the SMSF after the Member commences a Simple Account Based Pension. This is a tax saving of approximately $5,000 per annum compared to the tax payable had the income and realized capital gains been derived in the Member's personal name. Over an average retirement period of 30 years this can add hundreds of thousands of dollars to your final Super Benefit. In the above example the value judgment that the Investor must make is this: Is it worthwhile to pay $12,547 in tax today to save $5,000 in tax every year on the $450,000 Investment. We think it definitely is, because within three years you will have recouped the original tax bill of $12,000. Future tax savings will be yours to keep. However this is our opinion and you will have yours. This is the value judgment each Investor faces when considering consolidating investments outside super into their SMSF.