Whilst there is generally a widely held understanding, particularly amongst the advisory community, of the general restrictions on trustees of SMSFs acquiring assets from a related party, the ability of a fund to dispose of assets to related parties is often less understood.
Take for example, the SMSF that has amongst its assets, a residential property that the members of the fund would like to occupy in their retirement. The property was acquired by the trustees from an unrelated party and has continuously been leased to unrelated tenants.
Provided the SMSFs trust deed does not impose particular restrictions on disposing of fund assets to a related party, which is unlikely, there would be nothing that would prevent the trustees from disposing of the asset to a related party.
Assets may be disposed of either by sale or, provided a condition of release has been met in respect of any member's preserved benefit, as an in-specie lump sum benefit payment. The disposal must be conducted at market value and, where the asset is a collectible acquired after 30 June 2011, the disposal is supported by an independent valuation.
When disposing of an asset by sale or in-specie lump sum benefit payment, any capital gain generated by the disposal of the asset will need to be included as assessable income of the SMSF. Depending on the actual circumstances of the fund, the trustees may have access to the 1/3 discount that is available to superannuation funds. If the asset is supporting current pension liabilities of the fund, the assessable capital gain may be qualify in part of full as exempt current pension income and thereby be tax free to the SMSF.
However, where an asset is disposed of by way of an in-specie lump sum benefit payment to a member under 60 years of age, all or a portion of the value of the benefit payment may be taxable as a lump sum superannuation benefit in the hands of the member.
To determine the amount of tax payable, consideration will need to be given to the portion of the lump sum benefit payment that is represented by the member's taxable component. Then, depending on the member's age (i.e. under 55 or between 55 and 60), the fund may be required to deduct withholding tax instalments and remit them to the ATO. If the lump sum benefit payment consists exclusively of the transfer of the title of an asset, consideration will need to be given to how tax instalments will be deducted from the benefit payment.
When looking to manage capital gains tax implications at the fund level, the temptation to make an in-specie income (pension) payment may arise. Unfortunately income payments cannot be made by way of an in-specie transfer of assets. However, a tax effective outcome may be achieved by partially commuting an income stream with the partial commutation being represented by an in-specie lump sum benefit payment.
Any transfer of assets to or from a SMSF will require consideration to be given to the costs associated with the transfer. In most cases, then transfer of real property will have transfer duty implications for the party acquiring the assets. Additional costs in the form of professional, registration, valuation fees may also be payable, depending on the type of asset being disposed of.
Disposing of SMSF assets to a related party is a viable option for many SMSFs. It is anticipated that once the grandfathering provisions for collectibles acquired prior to 1 July 2011 ceases on 30 June 2016, we may see more activity in this space.
Peter Kelly is a SMSF Specialist Advisor and Manager – Technical Advice, Centrepoint Alliance.
Originally published by SMSF Essentials.
