When your SMSF receives in-specie contributions, two things happen in one go. Your SMSF receives a contribution. And your SMSF acquires an asset.
There are two ways for an asset to move into your SMSF. The trustee can either buy the asset. Or the trustee can receive the asset as an in-specie contribution.
Let’s use an example. Let’s say you bought an apartment 10 years ago, negatively geared it against your income. And you did well. But now the mortgage is paid off, so you start paying marginal rates on your rental income. So you do an in-specie contribution into your SMSF.
In-specie contributions are complex. They come with baggage. A ton of strings attached. Four to be exact.
1 – An in-specie contribution is a contribution, so you need to watch out for contribution caps.
2 – But an in-specie contribution is also an acquisition, so you also got the superannuation investment rules to deal with.
3 – An in-specie contribution usually comes from a related party – who else would transfer an asset into your fund? So you got all the rules around related party transactions to comply with, especially s66 of the SIS Act.
4 – And an in-specie contribution might require a loan. So you need to get around s67 of the SIS Act telling you not to borrow money.
No Change of Legal Ownership
For in-specie contributions no cash changes hands. There is no actual sale of the asset. No change of legal ownership.
The trustee – be it an individual or corporate trustee – owned the asset before the contribution. Not as a trustee in trust for the members. But in their own right as an individual or company.
After the contribution the individual or corporate trustee are still the legal owners of the asset. Nothing changed in that respect.
Transfer of Beneficial Ownership
What changed is the beneficial ownership of the asset. The contribution was a transfer of beneficial ownership.
Before the contribution the trustee – be it an individual or corporate trustee – held both the legal and beneficial ownership of the relevant asset.
After the contribution the trustee is still the legal owner of the asset. But beneficial ownership is now in the hands of the members. The trustee only holds the asset in trust for members. Because after all an SMSF is only a fiduciary relationship.
Trustee on Title
For an in-specie contribution the trustee needs to own the asset before the transfer – not as a trustee but in its own right. A trustee can only hold an asset in trust for members if it is the legal owner of the asset.
This is often an issue when assets are held in individual names but the SMSF has a corporate trustee, particularly when the asset is property. If the land register lists the title in individual names and the SMSF has a corporate trustee, there is no room for an in-specie contribution.
This comes up more often than you might think. Mum and dad investors buy a commercial property in individual names and negatively gear it against their salary and wages. Once the property is positively geared, they transfer it into the SMSF through in-specie contributions to move future lease income and capital gains into the concessional tax environment of super. At least, this is what they intend to do.
But if the SMSF has a corporate trustee, then this doesn’t work since the corporate trustee doesn’t have legal ownership of the asset. The title is in individual names.
But in practice it depends on whether the auditors let this through. And whether the ATO ever looks closer.
The transfer doesn’t need to cover the entire asset. It can just be part of an asset. For example 25% or 50%. So if an asset’s value exceeds the annual contribution and bring-forward caps, you can contribute the asset over time.
Let’s say a small business owner transfers 50% of his business premises into an SMSF using the bring-forward rule. So he now holds 50% as trustee and the other 50% directly. He waits three years and then starts transferring the remaining 50% in several tranches.
Whether you make a contribution in-specie or in cash, the normal contribution caps still apply. So if you want to transfer your business premises into your SMSF and its market value exceeds contribution caps, you do the transfer in stages over several years.
You can’t make any more non-concessional contributions, once your TSB hits $1.6m. TSB stands for Total Superannuation Balance. Think of it as everything you got in super.
So with that limit, it gets much harder to get an entire building into an SMSF. Anything that is worth more than $1.6m won’t fit. You would just transfer a portion into the SMSF and keep the rest outside of super.
An in-specie contribution is an acquisition the SMSF makes. And so all six superannuation investment rules apply. You need to….
1 – Pass the sole purpose test – s62 SIS Act
2 – Act at arm’s length – s109 SIS Act
3 – Keep in-house assets below 5% – s82 SIS Act
4 – Not acquire assets from related parties – s66 SIS Act
5 – Not hold assets for personal use – s62A SIS Act + para 13.18AA SIS Reg
6 – Not borrow money – s67 SIS Act
Look at s66 / # 4 again. Not acquire assets from related parties. But an in-specie contribution is exactly that. It is an acquisition from a related party. So this would put an end to any in-specie contributions.
But s66 contains three exceptions. Listed securities, business real property and in-house assets below 5%. So those three asset groups can still come into the SMSF via an in-specie contribution.
Related Party Transaction
An in-specie contribution almost always comes from a related party. Never say never, but who else would transfer an asset into your fund?
Since the asset comes from a related party, the legislator wants to make sure that the transfer happens at arm’s length. That the asset comes in at market value – not more and not less. So you got s66, s82 and s109 of the SIS Act to contend with.
There is no point in making an in-specie contribution for $3.50. So in-specie contributions are usually about substantial asset values. And that makes it more likely that a lender has a charge over the asset that allowed the asset’s acquisition in the first place.
If that is the case, the lender is unlikely to consent to an in-specie contribution. So you would refinance the loan and change it to an LRBA – probably with a different lender – to get around s67 of the SIS Act .
So looking at all this, you can probably see that in-specie contributions are doable but complex.
If you have a question, please email or call. There might be a simple answer to your query.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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Last Updated on 14 March 2020
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.