Transferring assets in specie in and out of an SMSF

31 July

By Steven Jell - Special Counsel at Slee Anderson & Pidgeon
Accurate as at date of publication

1 Introduction

1.1 An ‘in specie transfer’ is the term used for the transfer of a non-monetary asset from one person or entity to another without the need to convert the asset into cash.

1.2 It is possible to transfer certain assets in specie both in and out of an SMSF. The key benefit in doing so is the ability to transfer the asset without first needing to dispose of it and convert it to cash.

1.3 Whilst simple enough in theory, there are strict rules governing these types of transactions which if not followed correctly can result in harsh tax and other penalties for an SMSF or its trustee(s). Depending on an individual’s circumstances these rules can be complex and there are many intricacies advisers should be aware of to ensure their clients do not fall foul of these rules.

1.4 It will also be important to review the trust deed for a relevant SMSF to ensure it includes the necessary terms permitting in specie transfers.

2 Types of assets that can be transferred

2.1 There are rules that limit the type of assets an individual or someone associated with that individual can transfer to their SMSF.

2.2 Because of these rules, there are three types of assets that can be transferred in specie to an SMSF. These are:

(a) shares and other listed securities on an approved stock exchange (for example, the Australian Securities Exchange (ASX));

(b) managed funds (where the individual is one of many investors in the fund – known as a widely held unit trust); and

2.3 These restrictions only apply to the transfer of assets in specie to an SMSF. When transferring assets out of an SMSF, it is possible to transfer any asset that can be held by the SMSF by way of an in specie transfer provided the trust deed for the SMSF allows it.

2.4 Depending on the entity that manages the particular asset, there may be some specific requirements that must be satisfied to complete the transfer. For example, the share registry, Titles Office or other asset manager may have some specific paperwork or documents it requires to be completed before authorising the transfer of the asset.

3 Valuation requirements

3.1 Transferring assets in specie in or out of an SMSF must be done at market value and a SMSF trustee must be able to demonstrate the valuation has been arrived at using a ‘fair and reasonable’ process. When transferring assets in or out of a SMSF it will be necessary for a trustee to obtain and retain evidence of market value so it can demonstrate compliance with the relevant rules.

3.2 The ATO has some published valuation principles to guide SMSF trustees. These state that a valuation will be considered fair and reasonable where it meets all the following criteria:

(a) it takes into account all relevant factors and considerations likely to affect the value of the asset;

(b) it has been undertaken in good faith;

(d) is capable of explanation to a third party.

3.3 Where a SMSF trustee is required to support the acquisition of an asset from a related party was completed at market value, any valuation obtained must also be based on objective and supportable data.

3.4 The type of asset being transferred will be relevant when determining what evidence a SMSF trustee should obtain.

(a) For listed securities, the value can be ascertained from the relevant stock exchange.

(b) For managed funds, it will be necessary to contact the fund manager to obtain details of the value at the date of transfer.

3.5 When transferring an asset in specie from an SMSF, the evidence obtained by the trustee will be necessary to demonstrate the SMSF obtained a true market rate of return for the asset transferred.

3.6 Once the relevant parties have determined that a particular asset is of the type that can be transferred to an SMSF or that it is desirable to transfer it from an SMSF, the next step is to determine how the value of the asset transferred is to be treated.

3.7 Depending on all the circumstances, the whole or only part of the value of the asset might be transferred.

4 Contribution rules

4.1 Under an in specie transfer of assets to a SMSF, it is likely the value of the asset being transferred will be treated as a contribution on behalf of the individual making the transfer.

4.2 The rules regarding making contributions to superannuation changed substantially from 1 July 2017. These rules place a limit on the amount an individual (or someone contributing on their behalf) can contribute to superannuation.

4.3 While a detailed discussion of all the contribution rules is outside the scope of this paper, they must be considered as part of any strategy regarding the transfer of an asset to a SMSF.

Contribution caps

4.4 The types of contributions an individual can make can be broadly classified as before-tax contributions and after-tax contributions. There are ‘contribution caps’ which limit the amount that can be contributed under each category. These are simply a limit on the amount of contributions which receive the best tax treatment. This means it is possible for an individual to exceed these caps however, doing this is unlikely to provide a favourable tax outcome for the individual or their SMSF.

4.5 Before-tax contributions are referred to as ‘concessional contributions’. These are contributions generally made by someone else on an individual’s behalf (for example, employer superannuation guarantee contributions) or amounts you contribute with your own money and claim a tax deduction for.

From 1 July 2024, the cap on concessional contributions is $30,000. This cap is indexed periodically in line with average weekly ordinary time earnings (AWOTE).

4.6 After-tax contributions are referred to as non-concessional contributions. These are contributions made by an individual from their own money (or assets) for which they do not claim a tax deduction for.

From 1 July 2024, the cap on non-concessional contributions is $120,000. The non-concessional contributions cap is a multiple of the concessional contributions cap so will increase periodically at the same time as any increase to the concessional contributions cap.

4.7 There are also other types of contributions (including downsizer contributions, CGT small business contributions and personal injury contributions) each with their own different rules.

Carry forward unused concessional cap

4.8 If an individual has not maximised their concessional contributions in the past, it is possible to carry forward unused portions of their concessional contribution cap over a five year rolling period provided:

(a) their total superannuation balance (all amounts they have in superannuation across all superannuation funds) is less than $500,000 at 30 June of the previous financial year; and

(b) they have contributed less than the concessional cap for the relevant financial year in one or more of the previous five financial years.

Bring forward unused non-concessional cap

4.9 If an individual is under the age of 75 years they may be able to bring forward up to three years of non-concessional contributions. This can enable individuals to contribute large sums (or high value assets) to superannuation in a single financial year rather than staggering the contributions over several years.

4.10 The amount an individual can actually bring forward under these rules depends on their total superannuation balance at 30 June of the previous financial year.

4.11 For the financial year ending 30 June 2025, these rules work as follows:

Total super balance at 30 June 2024 Non-concessional cap in financial year ending 30 June 2025

Less than $1.66 million $360,000 – the individual can use this years cap plus bring forward the cap for the next two years

Between $1.66 million and $1.78 million $240,000 – the individual can use this years cap and bring forward next year’s cap as well

Between $1.78 million and $1.9 million $120,000 – the individual cannot bring forward any future years’ cap

$1.9 million or over Nil

4.12 The individual must not have previously triggered the bring-forward rule for the relevant period. For example, if an individual triggers the bring-forward rule in the financial year ending 30 June 2025 and contributes $360,000 to their SMSF then they will be using their non-concessional cap for the financial years ending 30 June 2025, 2026 and 2027. This means they will not be able to make additional non-concessional contributions during the 2026 and 2027 financial years (that is, until 1 July 2027).

5 Conditions of release

5.1 When transferring assets out of an SMSF it is important to ensure the person intending to access their superannuation entitlements is eligible to do so.

5.2 One of the core purposes of the superannuation system is to provide retirement benefits for individuals. This has the effect of preventing an individual from accessing their superannuation entitlements until certain requirements are met. These requirements are referred to as conditions of release.

5.3 To pay superannuation benefits to an individual, that individual must have satisfied a condition of release. Some conditions of release restrict the form of the benefit (for example, a lump sum or pension) or the amount of the benefit that can be paid. These restrictions are known as ‘cashing restrictions’.

While a detailed discussion of all the conditions of release is outside the scope of this paper, they must be considered as part of any strategy to transfer an asset in specie from an SMSF.

5.4 The most common conditions of release are that the individual:

(a) has reached their preservation age and retires;

(b) cases an employment arrangement on or after they turn 60;

(d) dies.

5.5 Before transferring any superannuation benefits to an individual, a SMSF trustee must:

(a) ensure the individual has satisfied a condition or release; and

(b) check that the governing rules of the SMSF allow it.

5.6 Releasing benefits to an individual who has not met a condition of release is illegal. If a SMSF trustee releases an individual’s entitlements before the individual is entitled to receive those entitlements then the trustee will be liable for administrative penalties. There will also be tax consequences for the individual who receives their entitlements prior to satisfying a condition of release.

6 Proportionate transfers

6.1 Depending on all the circumstances, the whole or only part of the value of the asset might be transferred in or out of the SMSF.

6.2 For example, Wilma’s husband Fred has died and Wilma has become entitled to a death benefit of $450,000 from Fred’s entitlements in their SMSF. As the SMSF’s investments include listed shares and cash, Wilma decides to have the lump sum paid as a combination of some of the cash held in the SMSF ($100,000) and by transferring some of the listed shares ($350,000) as an in specie transfer of assets.

6.3 Where the value of an asset an individual wishes to contribute to their SMSF is greater than their available contribution caps it is possible to transfer a portion of the asset as an in specie contribution and for the SMSF to purchase the remaining interest using other assets of the SMSF. If a strategy like this is undertaken then it is extremely important specialist advice is obtained prior to the transaction being completed to avoid the implications of the non-arm’s length income rules (see section 7).

6.4 If an SMSF does not have sufficient other assets to pay the balance of the purchase price then it is also possible for the SMSF to use the current limited recourse borrowing rules in some circumstances to assist with financing the payment by the SMSF for the remaining interest. These rules will require the asset being transferred to be held on trust for the SMSF under a bare trust.

6.5 Similarly, where the value of the asset to be transferred from the SMSF is greater than the value of the individual’s entitlements in the SMSF, then the SMSF could:

(a) transfer only a portion of the asset equal to the individual’s entitlements in the SMSF; or

(b) transfer a portion of the asset equal to the individual’s entitlements in the SMSF and sell the remaining interest to the individual (or a related entity of the individual) for its market value.

7 Non-arm’s length income rules

7.1 The taxable income of an SMSF is split into two components - a ‘low tax component’, which is taxed at concessional rates (15% or 0%) and a ‘non-arm's length component’, which is taxed at the top marginal tax rate (45%).

7.2 This means an SMSF should deal with all other parties on an arm’s length basis to avoid any application of the non-arm’s length income (NALI) provisions.

7.3 The operation of the NALI provisions has been extended to include circumstances where an SMSF incurs an outgoing or expense which is less than what would be expected if the parties were dealing with each other on an arm’s length basis.

7.4 For example, where an SMSF acquires real estate from a related party for below market value, all subsequent income from that real estate (such as rent) will be deemed to be NALI and taxed at the top marginal rate in the hands of the SMSF. The subsequent capital gain on the real estate when it is eventually sold by the SMSF will also be NALI.

7.5 To avoid the application of the NALI rules to the transfer of an asset in specie to a SMSF, it is possible to split the transfer of an asset to the SMSF partly as an in specie contribution and partly as a purchase of the remaining interest being transferred. It is the ATOs current view (as expressed in LCR 2021/2) that an in specie contribution can be made in conjunction with a SMSF purchasing part of an asset where a contract makes it clear the SMSF is only acquiring part of the asset and receiving an in specie contribution of the remaining interest in the asset. The ATO has provided the below example of how a transaction like this can be structured:

(a) During the 2023-24 income year, Nadia owns commercial premises that she leases to a third party which uses the premises to carry on a business. The commercial premises have a market value of $500,000.

(b) Nadia would like to transfer it to her SMSF, but her SMSF only has $400,000 in cash.

(c) Nadia’s SMSF purchases 50% of the commercial premises from Nadia under a contract for $250,000. Nadia makes an in specie non-concessional contribution of the remaining 50% interest in the commercial premises (valued at $250,000).

(d) The acceptance of the in specie contribution by Nadia as trustee of the SMSF is recorded by her in writing and the market value of the in specie contribution is reported in the SMSF’s financial statements.

(e) The SMSF also reports the non-concessional contribution to the ATO.

(f) Nadia’s SMSF continues to lease the commercial premises to the third party at a commercial rate of rent.

(g) As the commercial premises were acquired by the SMSF at market value and a commercial rate of rent is charged, the rental income derived by the SMSF is not considered to be NALI.

(h) Any capital gain that might arise from the later disposal of the commercial premises will also not be NALI.

7.6 It is extremely important any documents prepared to implement a strategy like this are prepared correctly and show that only part of the property is being purchased by the SMSF and part of the property is transferred as an in specie contribution. If this is not done correctly then it is likely the NALI provisions will apply to the transfer of the asset to the SMSF because the Fund will have received an asset without paying its full market value. This will be the case even if the in specie contribution relating to the remaining interest in the asset is recorded at market value in the SMSF’s financial statements and allocated to the member’s superannuation interest. For example:

(a) During the 2018-19 income year, Russell (as trustee of his SMSF) purchased listed shares from a related entity for $500,000.

(b) The market value of the shares at the time of purchase was $900,000. The terms of the agreement specified the purchase price as $500,000, rather than $900,000. Accordingly, the arrangement did not involve an in specie contribution being made to the SMSF. The SMSF cannot retrospectively document the shortfall in the purchase price as an in specie contribution if it was not contemplated at the time the arrangement was entered into.

(c) The non-arm’s length dealing between Russell’s SMSF and his related entity amounts to a scheme, which has resulted in his SMSF incurring an expense that was less than would otherwise be expected if those parties were dealing with each other at arm’s length. This expense was incurred in gaining or producing the dividend income. This means, any dividend income derived by the SMSF from the shares will be NALI.

(d) The non-arm’s length expenditure incurred in acquiring the shares will also result in any capital gain that might arise from a subsequent CGT event happening in relation to the shares (such as a disposal of the shares) being NALI. See paragraphs 8.8 and 8.9 for an explanation of how this operates in conjunction with the market value substitution rule.

7.7 In circumstances where there is a potential for non-arm’s length income, contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth) may also exist. Prior to implementing any arrangement like this it will also be important for advisers to consider whether the arrangement:

(a) is consistent with the SMSF’s investment strategy;

(b) results in an in-house asset;

(d) breaches the sole purpose test.

8 Capital gains tax

In specie transfers out of SMSF

8.1 The transfer of an asset out of an SMSF will trigger a CGT event for the SMSF, regardless of whether the transaction is completed as a sale or an in specie benefit payment. The capital gain will be based on the sale proceeds being at least the market value of the asset at the time of the transfer. If the value of the asset being transferred is greater than the value of the asset when the SMSF acquired the asset then this will result in a capital gain.

8.2 It the SMSF has held the asset for more than 12 months, the trustee of the SMSF can apply the general discount (1/3rd for a SMSF) to reduce its taxable capital gain.

This means the capital gain is initially reduced by one-third.

8.3 Depending on whether the members of the SMSF are wholly in accumulation phase (ie. 100% of their entitlements in the SMSF are held in accumulation accounts) or whether some of their entitlements are held in retirement phase income streams (pension accounts) will determine the tax outcome for the SMSF on the capital gain derived from the transfer of the asset.

This is because:

(a) the proportion of the income earned by the SMSF that relates to pension balances will be exempt from tax as exempt current pension income (taxed at 0%); and

(b) the proportion of the income that relates to the accumulation accounts (the amount not held in pension accounts) will be taxed in the SMSF at 15%.

8.4 The exact amount of the income that could be exempt from income tax will depend on a number of things including:

(a) the total member balances for all members (both in accumulation and pension accounts);

(b) whether the pensions being paid to the members receiving pensions were commenced during the financial year in which the in specie benefit payment is made; and

In specie transfers to SMSF

8.5 Similarly, an in specie transfer of an asset by an individual to their SMSF will trigger a CGT event for the individual.

8.6 If the individual has held the asset for more than 12 months, they can apply the general discount (50% for an individual) to reduce their taxable capital gain.

8.7 The SMSF will acquire the asset for its market value. This will be the starting amount used by the SMSF to determine whether it makes a capital gain when it later disposes of the asset.

8.8 Where a SMSF acquires an asset for less than its market value, the market value substitution rules in section 112-20 of the Income Tax Assessment Act 1997 (Cth) may apply to modify the cost base of the asset. This means, the SMSF may be treated as having acquired the asset at market value (even if it did not pay market value for the asset on acquisition). This will in turn affect the amount of an capital gain that may arise from a later disposal of the asset but will not affect the application of the non-arm’s length expenditure provisions (see section 7).

8.9 Using the same example from paragraph 7.6 where Russell’s SMSF acquired shares valued at $900,000 for $500,000:

(a) Two years later Russell’s SMSF sells the shares it acquired for $1 million.

(b) When calculating the capital gain for the SMSF on disposal of the shares, because the SMSF did not pay the market value for the shares on acquisition and the parties were not dealing with each other on arm’s length terms, the cost base of the shares will be modified by the market value substitution rule. This means the cost base for the shares will be their market value at the time of acquisition by Russell’s SMSF, which was $900,000 (despite the SMSF only paying $500,000 for the shares).

(c) The SMSF will realise a capital gain of $100,000 ($1 million sale proceeds less the deemed cost base of $900,000 – not the actual amount paid of $500,000).

(d) This has the practical effect of reducing the capital gain for the SMSF to $100,000 however, the capital gain is subject to the NALI provisions (and taxed at the top marginal tax rate in the hands of the SMSF).

(e) Because the SMSF held the shares for more than 12 months, the SMSF can also apply the general discount (1/3rd for a SMSF) to reduce its taxable capital gain to $50,000 (see TD 2024/5).

9 Transfer duty

Transfer duty concessions

9.1 Depending on the asset being transferred and the state in which the asset or SMSF is located, transfer duty may be payable on the transfer of the relevant asset either to or from the SMSF. This means the transfer duty consequences of an in specie transfer of assets both to or from a SMSF must be considered before any transfer is completed.

9.2 Transfer duty is a state-based tax, and the rules associated with each state are different.

9.3 The definition of what constitutes ‘dutiable property’ (that is, property to which the transfer duty rules apply) also differs between states. When looking at the common types of property for in specie transfers both in and out of an SMSF:

(a) Real estate will be considered dutiable property in every state. This means transfer duty will apply on the transfer of real estate to or from an SMSF unless a specific concession or exemption applies.

(b) There should be no transfer duty payable on the transfer of managed funds or listed securities such as shares however, this should be carefully considered (for example, to ensure the holding does not include an indirect entitlement to real estate).

9.4 Where concessions or exemptions are available for the transfer of real estate to a SMSF, they generally require the individual transferring the real estate to remain the beneficial owner of the real estate. For example, in Western Australia, nominal duty ($20) will be payable on the transfer of real estate to a SMSF if:

(a) consideration is paid, or will be paid for the transfer;

(b) either the transferor is the only member of the SMSF or the real estate will be held by the SMSF on behalf of the transferor only (so no other member of the SMSF can obtain an interest in the real estate); and

(c) the real estate is held by the SMSF only to be provided to the transferor as a retirement benefit (section 122 of the Duties Act 2008 (WA)).

There are similar provisions in section 62A of the Duties Act 1997 (NSW) and section 41 of the Duties Act 2000 (Vic) regarding real estate in NSW and Victoria. There are no similar provisions in Queensland.

9.5 There are also concessions or exemptions in some states for the in specie transfer of real estate from a SMSF to a member of the SMSF. Again, each state has its own rules regarding these transactions and specialist advice should be obtained before a transfer is completed.

9.6 In Western Australia, nominal duty ($20) will be payable on the transfer of real estate from a SMSF to an individual (or if they have died, a dependant or the legal personal representative of the individual) if:

(a) the individual was a member of the SMSF when the real estate was acquired by the SMSF;

(b) the value of the real estate does not exceed the individual’s entitlements in the SMSF; and

If the value of the real estate exceeds the individual’s entitlement in the SMSF then the general rate of duty will be chargeable on the excess amount. For example, if a member of a SMSF received land valued at $400,000 from the SMSF and the member’s interest in the SMSF was $300,000 then the member would be responsible for duty based on a value of $100,000.

There are similar provisions in section 41A of the Duties Act 2000 (Vic) regarding real estate in Victoria. There are no similar provisions in New South Wales or Queensland.

Transfers to third parties

9.7 Where an individual is looking to transfer assets from a SMSF in specie but would prefer the assets to be transferred to a related entity rather than be held in their individual name (for example, for asset protection or estate planning purposes), it is possible to implement an arrangement for the individual (or individuals) to request a member payment from the SMSF equal to the value of the asset to be transferred, for these amounts to be contributed to the related entity (for example, by loan, gift or share subscription depending on the structure of the chosen related entity) and for the related entity to purchase the asset from the SMSF.

While an arrangement like this will not avoid the application of the transfer duty rules of the relevant state, it can be used to avoid the individual paying transfer duty twice where the desired outcome is to hold the real estate currently held in a SMSF in a related entity rather than in their own name.

10 Conclusion

While it is possible to transfer certain assets in specie both in and out of an SMSF, there are many things to be considered prior to a transaction like this being completed.

If you or one of your clients is considering or would like assistance with completing an in specie transfer of assets in or out of an SMSF, please feel free to contact me.

11 Contact details

If you have any questions, please contact me.

Steven Jell

Special Counsel

T 61 8 9792 0922

E steven.jell@sleeanderson.com.au

The content of this publication is correct at the date of publication. It is always possible the law could change which may result in the content of this publication no longer being correct.

This publication is only intended as a general overview of issues relevant to the topic and is not legal advice. If there are any matters you would like us to advise you on in relation to this publication, please let us know.

Sarah Rowlands