What is an in specie contribution?
Fabian Bussoletti looks at the considerations advisers need to make when advising SMSF clients on in specie contributions.
When advising self-managed superannuation fund (SMSF) clients, it is important to be aware that super contributions can be made either by using cash, or by transferring a physical asset into the fund – generally referred to as making an ‘in specie’ contribution.
What is an in specie contribution?
Making a contribution in specie simply means that an asset (rather than cash) is transferred into the fund in order to make a super contribution.
Regardless of whether the contribution is made via cash or in specie, in many respects they are treated in much the same way – for example:
- The work test rules continue to apply for those aged 65 or over;
- They will both be counted toward the relevant contribution cap(s) in the same way; and
- In specie contributions may result in an individual being eligible to claim a personal tax deduction for some/all of the contribution – based on the usual eligibility criteria.
Further, in specie contributions, which are typically made to an SMSF by either a member of the fund or a related party of the fund, can only be made where the asset being transferred is one that the fund is able to acquire without breaching the section 66 prohibition in the Superannuation Industry (Supervision) Act 1993 on acquiring assets from members or related parties – typically listed shares, managed funds, or business real property (BRP).
How are in specie contributions taxed?
As an in specie contribution often involves the transfer of an asset from an individual to a super fund, this will give rise to a capital gains tax (CGT) event and a potential capital gain being crystallised in the hands of the contributor (i.e. typically the fund member).
Where the individual is eligible to do so, he/she may be able to claim some (or all) of the amount contributed to the super fund as a personal tax deduction which may help to reduce their assessable income and therefore their personal tax liability incurred as a result of the transfer.
Capital gains tax (CGT) considerations for in specie transfers
Where the asset being transferred to the super fund is BRP, and the property also satisfies the ‘active asset’ definition for the purposes of the small business CGT concessions, applying these concessions may help to alleviate any resulting capital gain – as well as unlocking an additional contribution cap.
An active asset is broadly defined as:
An asset that is owned by the taxpayer and:
- Is being used, or held ready for use, in the course of carrying on a business by the taxpayer; or
- Is used, or held ready for use, in the course of carrying on a business by the taxpayer’s affiliate, or by another entity that is connected with the taxpayer.
An asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:
- You;
- Your spouse or child under 18 years;
- Your affiliate; or
- An entity connected with you.
Certain CGT assets cannot be active assets, even if they are used or held ready for use in the course of carrying on a business – for example, assets whose main use is to derive rent.
Business real property on the other hand, is broadly defined as:
Real property, where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not).
Perhaps the key difference between the active asset definition and the definition of BRP is that the active asset definition requires the property to be used in the business of the member, an affiliate, or a connected entity which is clearly narrower than the BRP definition. As such, not all in specie transfers involving BRP will be eligible for the small business CGT concessions.
Example 1
Barney aged 64 and Betty aged 63, are joint owners of a commercial property, purchased in 1990, and currently valued at $3.1 million. Until recently Barney and Betty operated a sporting goods business from this property, however they are selling the business to retire.
They decide to transfer this property into their SMSF as an in specie non-concessional contribution for each of them. The capital gain on transfer will be $2 million to $1 million each.
Their accountant confirms that Barney and Betty will each meet the necessary conditions to be eligible for the 15-year exemption. As such, the entire capital gain of $1 million each will be exempt from tax.
As Barney and Betty are both eligible for the 15-year exemption, they can each contribute their share of the property’s value, up to $1.415 million under the CGT cap. The remaining contribution of $155,000 each could be contributed under the standard non-concessional cap rules.
For the sake of completeness, it should also be noted that transferring business premises into an SMSF may give rise to stamp duty and potentially GST implications. Both of these matters will require professional advice to be obtained from an appropriately qualified accountant or lawyer.
What is considered as in specie contribution
Determining whether a contribution has been made to a public offer fund, and when the contribution is considered to have been made, is usually a relatively straight forward process. However, when advising clients with an SMSF, this may not always be so simple.
Fortunately, the Australian Taxation Office (ATO) has issued a Tax Ruling (TR 2010/1) which provides some guidance in relation to super contributions – which is particularly useful when advising clients with an SMSF.
As a starting point and perhaps a guiding principle, this ruling states that:
“A contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.”
This relatively simple statement is insightful as it clearly envisages that a contribution can be made in any number of ways, with the ruling going on to clarify that:
“The capital of a superannuation fund may be increased directly by:
- Transferring funds to the superannuation provider;
- Rolling over a superannuation benefit from another superannuation fund;
- Transferring an existing asset to the superannuation provider (an in specie contribution);
- Creating rights in the superannuation provider (also an in specie contribution); or
- Increasing the value of an existing asset held by the superannuation provider.
The capital of a superannuation fund can also be increased indirectly by:
- Paying an amount to a third party for the benefit of the superannuation provider;
- Forgiving a debt owed by the superannuation provider; or
- Shifting value to an asset owned by the superannuation provider.”
In specie transfer of existing asset
Where an asset is transferred into an SMSF and market value consideration is given for that asset, for example an arm’s length sale of a property, the capital of the fund has not been increased.
On the other hand, if an asset is transferred into an SMSF for no consideration, or for consideration that is less than the market value of the asset, the capital of that super fund has been increased – and as such an in specie contribution is deemed to have been made.
But at what point in time is the in specie contribution considered to have been made?
At first glance, the ATO’s initial answer to this question might seem rather obvious. That is, the transfer will be deemed to have occurred when the super fund becomes the owner of the asset.
However, the ATO explains that a super fund is considered to become the owner of an asset when it receives the beneficial ownership of that asset – not necessarily when legal ownership is actually transferred.
While a change in legal ownership may be relatively easy to establish (as this is often evidenced by the fund becoming the registered owner of the asset), it is important to be able to identify when the beneficial ownership of an asset is considered to change hands – which may occur earlier than the change in legal ownership.
Getting this right is important for a number of reasons, but perhaps most importantly from a superannuation perspective at least, because it will determine when a contribution is deemed to have been made – which in turn will impact on when that contribution will be counted toward an individual’s contribution cap(s).
In specie transfer of property
When dealing with an in specie transfer of property, a super fund acquires beneficial ownership of the property when the fund takes possession of a properly executed transfer form that is in registrable form together with any title deeds and other documents necessary to procure registration of the super fund as the legal owner of the land.
Example 2 – From TR 2010/1
Bob owns land on which retail premises have been constructed. Those premises include the site from which Bob runs his pharmacy business. Bob decides to contribute the land (being business real property) to his SMSF.
The fund has a corporate trustee, CarPharm Pty Ltd, of which Bob and his wife Janet are directors. The directors of CarPharm Pty Ltd resolve to accept the contribution of the land on 1 June 2009.
After obtaining advice from their solicitor, Bob, as owner of the land, and Bob and Janet, as directors of the corporate trustee of the fund, complete the necessary land transfer forms and take possession of those forms and the relevant title deeds on Monday, 29 June 2009 to hold in their capacity as directors of the corporate trustee.
Therefore, as at that date, Bob and Janet hold all the documents in registrable form necessary to obtain registration of title to the land in their capacity as directors of the trustee of the fund. Janet lodges them with the registrar of land titles on 2 July 2009. CarPharm Pty Ltd is registered as owner of the land on 9 July 2009.
In these circumstances, Bob’s contribution will be made on 29 June 2009.
In specie transfer of isted securities
Similarly, a super fund will have acquired beneficial ownership of shares or units in a listed company or trust when the fund obtains a properly executed off-market share transfer that is in registrable form.
Example 3 – From TR 2010/1
On 26 June 2009, Cheung signs an off-market share transfer form to effect a contribution of shares from herself to Cho Pty Ltd, the trustee of her SMSF.
However, Cheung leaves certain parts of the form blank for completion by her stock broker, as her shareholdings, and those of Cho Pty Ltd are broker sponsored. Cheung posts the transfer form to her broker on the same day.
Cheung’s broker adds the omitted information on 2 July 2009 and completes the transfer through CHESS. Cho Pty Ltd is registered as a shareholder on 5 July 2009.
Cheung’s contribution will be made on 2 July 2009 as it is not until that day that the relevant transfer has been completed to registrable form.
Clearly in both the above examples, the change in beneficial ownership, and therefore the timing of when the contribution will be deemed to have been made, broadly occurs when everything that needs to be done in order to facilitate the change in legal ownership has been done in full.
As such, the timing of a contribution will not be dependent on, nor impacted by, delays arising from say a delay in administration of the change in legal ownership – whether that be with respect to a change to a property title, or with the relevant share registry.
Fabian Bussoletti is the technical strategy manager at AMP.
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