How SMSF in-specie contributions work

How SMSF in-specie contributions work

In specie contributions are essentially all contributions made to your super that are not a cash contribution. As in specie contributions do not involve a transfer of cash, naturally this means that it involves a transfer of some other asset from the member to their super fund.

Generally there are restrictions surrounding super funds acquiring assets from members. The only assets that are currently allowed to be contributed to a super fund are:

  • Listed securities – these are the most commonly transferred
  • Business real property – this generally means commercial property. You cannot transfer residential property
  • An in-house asset – this covers assets such as investments in a related party and cannot exceed 5% market value of the assets in the fund

All assets contributed to the fund must be transferred at market value. If there isn’t an open market for which a reliable market value can be determined (e.g. the Australian Securities Exchange), then an independent valuation must be done.

Why do it?

Making an in specie contribution of assets to your super can be quite beneficial, as transferring assets from the member to the fund can lower the overall level of tax. Remember, for the assets held in your personal name, you have to pay tax on the income at your marginal rates. When transferred to the fund, the tax is only 15% on the income, 10% on capital gains for investments held for more than 12 months, and 0% if you’re in pension phase.

Things to watch out for…

Capital gains tax

Because an in-specie contribution is a non-cash contribution, the member is effectively selling the asset that they are contributing from themselves to their super fund. This triggers a ‘capital gain event’, by which any resulting loss or gain that the member makes by transferring the asset must be accounted for in their individual tax return.

Example: Craig purchases 200 BHP shares at $25, costing $5,000. Five years later, he wishes to contribute these shares to the fund. At the time he would like to contribute the shares, they are now worth $35 each, a total value of $7,000. The value of the super contribution to the fund is $7,000 and Craig must take up a capital gain of $2,000 in his personal tax return for that year (N.B. he may also claim the 50% discount as he has held the shares for more than 12 months).

This means that if you have large unrealised capital gains, it may be painful to transfer them into your super fund, as you will have to pay tax for something you haven’t received any cash in hand for.

Contribution limits

Another thing to watch out for when making in-specie contributions is to stay under the annual contribution limits. Just because the contribution isn’t made in cash, it doesn’t mean it isn’t counted as part of the cap.

The limits are, for non-concessional contributions, $150,000 per person per financial year, up until you turn 75. If you are between 65 and 75, you can only contribute if you meet the work test. People under 65 years of age may be able to make non-concessional contributions of up to three times their cap over a three year period (i.e. $450,000). This is known as the ‘bring-forward’ option.

This might not be so much of an issue when transferring shares, but obviously with the market values of property, it can be quite difficult staying under these limits when transferring property. However, you really want to stay under these limits as excess contributions tax can be a high price to pay for exceeding them.

Possible changes in law

One of the proposals brought forward in the 2012 Budget announced last May was that all related party transactions (including the transfer of assets by in-specie contribution) was to be made ‘on-market where one exists’. This particularly applied to shares, and meant that the contribution of shares could no longer be made via off-market transfer. The initial start date for this was originally going to be 1 July 2012, however due to complications and consultation with the industry, this has been deferred to 1 July 2013. So, if you’ve been looking to transfer shares from yourself to your super fund off market, as the law stands, you currently have until the end of this financial year to do so.

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