Transfer tactics: getting assets into SMSFs

One of the main reasons for having a self-managed superannuation fund (SMSF) is the direct control the trustees have over investment decisions.

Control includes obtaining access to a wider range of investments if required and decisions relating to the timing of buying and selling a particular investment.

The attractiveness of these aspects of running a SMSF cannot be underestimated for trustees who wish to take an active interest in its operation.

When the control aspects of operating a SMSF and the reforms introduced by the ‘simpler super’ legislation are combined there is greater incentive to transfer personal investments to superannuation.

However, it is necessary for a financial planner to take into consideration a number of factors that ensure any transfer is conducted tax effectively and within the limitations imposed by the superannuation legislation.

Failure to take these factors into account may result in an expensive exercise for the client and their adviser as well as exposure to penalties under the Superannuation Industry (Supervision) Act 1994 (SIS Act).

The factors to be considered in the fund acquiring an asset, by transfer or purchase, from a related party are:

> whether the asset can be acquired by the fund;

> if it can be acquired, then how is the purchase or value transferred to be treated, for example, as a contribution;

> the taxation consequences of the acquisition such as stamp duty, capital gains tax (CGT) and other taxes or duties;

> ensuring the trustees of the fund are the legal owners of the asset on purchase or transfer. This can be an issue with real estate as the title documents for the property record the name(s) of the trustee as the legal owner and do not recognise the property is held in trust. This is the job of other documents such as the contract for sale or a Declaration of Trust over the property.

When determining whether a particular investment can be acquired by the fund, Section 66 of the SIS Act places a general prohibition on the fund from acquiring an asset from a related party.

There are exceptions to the general rule that include:

> a listed security such as shares, options, debentures and warrants listed on an ‘approved stock exchange’;

> commercial real estate used wholly and exclusively for running a business; and

> an in-house asset such as an investment in a related party.

A related party is defined in section 10 and Part 8 of the SIS Act and includes members and trustees of the fund, their families, partners and companies and trusts that are controlled by related parties.

An in-house asset is defined in Part 8 of the SIS Act and is a loan to, investment or lease of a fund asset in a related party or related trust. In-house assets are limited to no more than 5 per cent of the market value of the fund’s total assets.

If it is permissible for the superannuation fund to acquire a particular investment from the related party the next issue to be considered is how the acquisition will take place.

The whole or part of the value of the investment can be transferred to the fund as a contribution or the superannuation fund could purchase a part or whole of the investment if it has the resources.

In deciding the proportion of the investment to be transferred to the fund as a contribution, it is necessary to compare the value transferred to the relevant contributions caps for the member or members, if the investment is jointly owned.

If the value of the investment transferred plus any other concessional or non-concessional contributions made for a member are exceeded then any excess can be taxed, in total, at 46.5 per cent and possibly as high as twice that in some cases.

From July 1, 2007, the concessional contributions cap is $50,000 (indexed) for anyone under age 50 and for those 50 and above the concessional contributions cap is $100,000 (unindexed) between July 1, 2007 and June 30, 2012.

After that, the concessional contribution for those aged 50 and older will be the $50,000 as indexed. The non-concessional contributions cap is $150,000 per annum.

However, where the person is under age 65, the next two years non-concessional contributions can be brought forward so that a person can make up to $450,000 as a non-concessional contribution at any time during the three-year period.

Where it is proposed to transfer an investment to a superannuation fund as a contribution, it is possible for a couple aged 50 and older to contribute up to $1.1 million consisting of $900,000 non-concessional contributions and $200,000 concessional contributions.

For anyone under age 50 the maximum amount would be $1 million. Of course, the relevant individuals must be eligible to make deductible contributions to the fund.

While the transfer of some investments such as shares and other listed investments are relatively easy to transfer to the fund, the transfer of real estate is another matter because it is unable to be divided into smaller parcels.

In comparison, it is easier to divide shares into a parcel that has a value as near as possible to the relevant contributions caps or the desired contribution.

In the case of property, advisers and their clients need to plan how it can be acquired by the fund.

The plan needs to take into account how the acquisition will fit within the contributions caps, the tax consequences and the cash flow aspects of the transfer on the client and the fund.

The skill of the planner is to ensure a balance between these factors is attained. For example, the transfer of the value of the property by a client that is equal to the relevant contributions cap may not provide the most tax-effective option or provide sufficient cash flow for the fund.

Case study: 1

Mark and Sue, who are in their late 40s, would like to transfer some of their personal investments to their SMSF.

Mark is a professional investor and qualifies for a tax deduction for contributions he makes to the fund. Sue is employed on salary and wages. It is possible for Mark and Sue to make combined contributions of up to $950,000 to the fund from their personal resources. This assumes that they have not triggered the non-concessional cap in the previous three years.

It may also be possible for Mark and Sue to access the CGT retirement concessions for small business if the transfer of the commercial property qualifies for the concession.

The current value of Mark and Sue’s personal investments is $1.5 million. The personal investments consist of an unencumbered commercial property valued at $1.2 million and $300,000 in listed shares.

In deciding which investments can be transferred to Mark and Sue’s SMSF the tax consequences of the transfer would need to be considered.

If some of the shares they own contain capital gains or losses then it may be worthwhile to transfer those shares that create the lowest tax liability.

If the commercial property has the lowest capital gain then it may be worthwhile to transfer it to the fund.

If the property is transferred then the manner in which the property will be owned between Mark, Sue and their SMSF needs to be considered. The property could be owned as tenants in common or via a trust or company providing it meets the requirements of SIS Regulation 13.22C.

If the property was to be held as tenants in common part of its value would be transferred as a contribution to the fund.

This would be recognised by a sale agreement and a declaration of trust would be made over the trust to recognise that the legal ownership of the property is that of the SMSF.

The remainder of the property could be transferred to the fund over time or, if the fund had sufficient cash, it could purchase that part of the property not transferred to the fund.

In some states, where property is transferred for no consideration and the beneficial owners of the property are the only beneficiaries of the superannuation fund no stamp duty may be payable.

Rather than ownership of the property as tenants in common, it is possible to transfer the property to a unit trust or company that satisfies SIS Regulation 13.22C.

Providing the unit trust or company meets certain conditions then the shares or units held will not be included in the in-house assets of the SMSF.

The benefit of a SMSF holding the units or shares is that greater flexibility is available as to the number of shares that can be transferred between the parties.

This is not available for property held as tenants in common in view of the cumbersome nature of any transfer.

The conditions required to satisfy Regulation 13.22C are that the trust or company:

> has no borrowings;

> has assets that have no change over them;

> has not lent money to anyone else apart from an account with a bank or other deposit-taking institution;

> has not acquired an asset from a related party other than business property;

> does not undertake a business;

> undertakes all transactions on an arm’s length basis.

Case study 2

George and Mandy wish to transfer a commercial property to their SMSF. The value of the property exceeds the contributions caps.

Rather than transfer part of the ownership of the property to the SMSF and own it as tenants in common, they decide to establish a unit trust.

They transfer the property to the unit trust and units equal to the value of the relevant contributions are issued to the fund, and the remainder of the units are issued to George and Mandy.

This will allow George and Mandy or the SMSF to transfer units between each of the parties flexibly.

The introduction of the lower limits on the non-concessional contribution caps mean that clients who wish to transfer investments to their SMSF need to consider a range of factors.

These factors not only involve the impact of the caps on the value transferred as a contribution but also the tax and cash flow implications of the transaction.

Graeme Colley is the technical manager at Super Concepts.