Mastering 'In Specie' Transfers: A Concise Guide for SMSF Trustees

Trustees of Self-Managed Super Funds (SMSFs) would undoubtedly be aware of the mechanism of making contributions to their super accounts. However, the concept of moving an asset like shares or property in or out of the fund without exchanging cash might be less known.

In specie transfers, otherwise referred to as off-market transfers, involve the shifting of non-monetary assets into or out of super funds without the need to liquidate them into cash. The Latin term 'in specie' translates to 'in its actual form'.

Like all aspects of super, stringent rules govern this process. One of these rules dictates that any in specie asset transfers must be performed at the present market value. These transfers could also potentially affect your contribution limits and tax status.

While in specie contributions are permitted by most super funds, it is a strategy that SMSFs employ more frequently than public super funds. This article focuses on in specie transfers as they pertain to SMSFs.

What are the permitted forms of in specie transfers? As a general rule, you should avoid purposefully acquiring assets (including in specie contributions) from related parties of your fund, such as family members or business partners. Nevertheless, there are exceptions to this rule.

Australian superannuation legislation only permits in specie transfers of the following types of assets:

• Listed shares and other securities on an approved stock exchange, such as the Australian Securities Exchange (ASX)
• Managed funds
• Business real property (land and buildings used solely for business purposes) 

Note: An SMSF can purchase residential property from a non-member or unrelated party. However, an SMSF is prohibited from buying residential property from a member or a related party, even if the purchase price aligns with the market value. This condition effectively prohibits in specie transfers of residential property.

How does it work?

In specie asset transfers can be either made into or out of an SMSF, in either scenario, they must reflect the market value.

Transferring in specie assets into an SMSF: Members of an SMSF can initiate an in specie asset transfer to their fund by:

• Filling out and submitting an Off-Market Transfer form for the transfer of ASX-listed securities. This form is accessible through any financial institution that trades in securities. The SMSF should be mentioned on this form as the buyer of the shares being transferred. To transfer managed funds, an Off-Market Transfer form must also be submitted, however, it must be lodged directly with the fund manager.
• Executing a contract of sale for commercial property transfers. The SMSF should be listed as the buyer of the property on this contract. Members who wish to make this type of in specie transfer should consult a solicitor to prepare the paperwork and submit the required documents to the revenue office of their state or territory.

Transferring in specie assets out of an SMSF: In specie transfers can also be carried out from an SMSF, for instance, when the SMSF is being closed.

If the asset is paid out to the member as a lump sum (for instance, when they have reached their preservation age and/or met a condition of super release), an Off-Market Transfer form or a contract of sale for commercial property must be filled out, listing the member as the buyer. In specie transfer payments cannot be made as pensions; they must be paid as lump sums.

Alternatively, if the asset is being transferred to another super fund, that fund will have to be listed as the buyer on either the Off-Market Transfer form or the contract of sale for commercial property.

Why perform an in specie transfer?

The primary reason for in specie asset transfers is usually potential tax savings.

For example, if an SMSF member in a high tax bracket has personal assets generating income, performing an in specie transfer to place the asset into the concessionally taxed super environment might be a wise financial move. Instead of paying personal income tax of up to 45% outside super, your super fund would pay a tax of 15% on income generated or no tax in retirement phase.

However, before you make any moves, it’s advisable to seek professional advice to determine if this would be suitable for your specific financial circumstances and needs.

How are in specie contributions taxed?

When a member transfers an asset into their SMSF, they can choose to classify it as a contribution or an asset sale.

If you decide to classify an in specie asset transfer as a contribution, you also get to decide whether it will be a concessional (before tax) or non-concessional (after tax) contribution.

In Australia, concessional contributions are taxed at 15% (plus an additional 15% if your annual income including concessional super contributions exceeds $250,000), up to certain contributions limits, currently $27,500 per financial year. Non-concessional contributions aren’t taxed, but there are also limits to how much you can contribute each year, currently $110,000 per year or $330,000 for members aged under 75 using a bring-forward arrangement.

The value of the asset transferred as a contribution will be added to the SMSF member’s account balance.

However, if the SMSF member decides to treat the in specie asset transfer as a sale to their fund, the value of the asset will be distributed proportionally to each member of the fund based on their ownership of the SMSF’s other assets at the time of the transfer.

What are the potential downsides?

An in specie asset transfer into your SMSF essentially limits your access to the asset until you reach your preservation age and fulfill a condition of release. This is an important consideration, so you need to be sure you won’t need access to any assets you transfer before then.

It’s also worth bearing in mind that any transfers of business property will incur government stamp duty. The amount payable depends on the value of the property transferred and the stamp duty rate charged by the state or territory government where the property is situated. Transfers of shares and other securities do not attract stamp duty.

What about capital gains tax (CGT)?

Tax considerations are likely to be a major factor. In specie asset transfers have implications for CGT. When ownership of an asset changes, the asset is considered to have been sold, hence, the transfer is subject to capital gains tax.

For instance, if a member has made a capital gain on an in specie asset transfer into their SMSF, they will need to:

• Add the full capital gain from the sale to their personal taxable income in the year they make the transfer if they owned the asset for less than 12 months, or
• Add 50% of their capital gain to their personal taxable income in the year they make the transfer if they owned the asset for more than 12 months. If you are transferring the asset at a loss, then you can claim that loss on your personal income tax return, which can then be used to offset future capital gains.

On the positive side, no CGT is payable by the SMSF if the transferred asset is sold after the member retires and begins an account-based pension.

Nevertheless, given the potential costs and time involved in transferring assets into your SMSF, you’re likely to consider an in specie strategy only if you plan to hold the asset for the long term.

Final words

In conclusion In specie asset transfers in and out of super are achievable for listed securities and business real property. However, there are many things to consider, advantages and drawbacks, so it’s beneficial to seek independent professional advice to determine whether an in specie asset transfer is suitable for your personal financial situation.