For Adviser use only
An in-specie contribution occurs when a member transfers ownership of an asset to their SMSF. The capital value of the fund increases and is considered a contribution from the person whose member balance has grown.
All superannuation funds can accept in-specie contributions, however they’re more commonly associated with SMSFs than public offer funds. While an in-specie contribution is considered an acquisition from a related party, which are generally prohibited, there are still enough exceptions for in-specie contributions to be a valid strategy.
Most in-specie contributions are made using listed shares or business real property. The transfer is deemed to be a disposal for the member and any gain realised may be subject to capital gains tax (CGT). There may be some concessions available, particularly where the property was used by the individual in their own business or that of an associate.
It’s not necessary that the entire value of an asset is transferred to an SMSF be considered a contribution. This is particularly beneficial where the value of the asset is greater than the contribution caps available to the contributors.
If a property valued at $400,000 is transferred to an SMSF and its entire value was considered a contribution, it could result in an excess non-concessional contribution of $100,000.
To avoid this outcome, we could treat $300,000 of the transfer as a contribution using the higher cap available under the bring-forward rule and the remainder as a sale. The SMSF would have to transfer $100,000 of cash or other assets to effect the sale on that portion of the property.
Assets can also be transferred out of the fund as in-specie payments, although importantly, only lump sum payments can be made in-specie. Pension payments must be made in cash. The rules with respect to acquisitions from related parties do not apply to these transactions, as the SMSF is disposing of, not acquiring the asset.
This strategy allows for an SMSF member to make a concessional contribution and claim a tax deduction in a particular year, but have it count towards their contribution cap in the following year, effectively bringing forward the concessional cap from that year.
SIS regulation 7.08 states that the trustee of a superannuation fund has until 28 days after the end of the month a contribution is received to allocate that contribution to a member’s account (unless it’s not reasonably practicable to do so). The ATO's Tax Determination 2013/22 provides an example that relies on this regulation to delay an allocation, resulting in a member making a contribution in one year and having it allocated to the cap of the following year.
The following two situations may benefit from this strategy.
As the contributor is eligible for a tax deduction in the year the contribution is made, it’s possible to have the deduction in an earlier year than the year the contribution cap is actually used.
Peter is selling his business and doesn’t expect to have significant taxable income in the following year. He also does not have any unused concessional contribution cap from the 2018/19 or 2019/20 financial years. He could make two personal deductible contributions of $25,000 in the financial year the business is sold, one of which is made in June. Using the strategy, he could delay allocating the June contribution until July. As a result, he is able to contribute more into superannuation as he may not have had sufficient taxable income in the following year to make a personal deductible contribution.
He can also claim a $50,000 deduction to offset his higher assessable income from the sale of the business. Plus, by allocating the contribution over two years, he won’t have any excess contributions. Importantly, in this situation, he would need to make two separate contributions of $25,000, instead of a single contribution of $50,000, as the ATO don’t allow portions of a contribution to be allocated separately.
SIS regulation 7.04 states that the contributor must satisfy the contribution restrictions at the time the contribution is made, not when it’s allocated. This distinction would benefit the following contributors who can make a contribution in June and allocate it in July using the cap from a year they would be unable to contribute:
those no longer working for a number of years who turn 67 in June where they make the contribution before their birthday
these aged between 67 and 74 who satisfy the work test this year but won’t next year (they may separately use the work test exemption)
those who turn 75 on or after the 1st of May. As a contribution can be accepted up until the 28th day of the month after the individual turns 75, so those turning 75 during May could make a contribution right up until the 28th of June.
While the ATO’s determination only covers concessional contributions, the strategy could also work for non-concessional contributions by allowing an individual to make non-concessional contributions in a year they otherwise wouldn’t be able to. It could also assist with contributing lumpy assets.
Mary 63, has business real property worth $400,000 that she wishes to contribute into her SMSF. She has the following options:
Contribute $100,000 of the property this year, so she and the SMSF are tenants in common, then transfer the remaining $300,000 next year.
Transfer the whole of the property to the SMSF this year and treat $300,000 as a contribution and $100,000 as a sale.
Transfer the whole of the property into the SMSF this year and treat $100,000 as a contribution and $300,000 as a sale, assuming the SMSF has sufficient other assets to pay her as consideration. The $300,000 received from the fund could then be contributed as a non-concessional in the following year.
Another approach would be to transfer the property to the SMSF in one go in June, with $300,000 as a non-concessional contribution and $100,000 as a sale. The $100,000 in proceeds could then be contributed back to the SMSF and that contribution allocated immediately.
The $300,000 contribution could then be allocated in July, resulting in the entire property being contributed in a single year without triggering an excess contribution. The $100,000 would be treated as a sale because portions of this amount can’t be allocated separately. By treating this amount as a sale and then a re-contribution, two separate contributions are created.
When using the delayed allocation strategy, the ATO have broadly commented that it should not be used to circumvent the changes brought in from 1 July 2017, as in their view Part IVA or the general anti-avoidance rules may apply. Their views are expressed in SMSF Regulator’s Bulletin SMSFRB 2018/1.
SMSFs are treated differently from other superannuation funds in a number of legislative and regulatory ways and in order to qualify for this different treatment, which is generally more concessional.
FOR ADVISERS USE ONLY
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