In specie transfers of property out of Self Managed Super Funds (SMSF)
We are starting to see more superannuants buying residential investment properties within their SMSFs, with the intention of paying out the property to themselves as a benefit payment once a condition of release has been met. Under the current rules, SMSF members or related parties are unable to lease or use residential property held by their SMSF.
Even with members over 60 years of age being able to draw down on tax free pensions, there are potential Capital Gains Tax (CGT) and stamp duty issues that should be considered when transferring out a property to a member as a benefit. The issues arise from pension payments only being able to be withdrawn as a cash payment. Therefore, if an asset other than cash is to be paid out to a member, the payment must be made as a lump sum.
Lump sum payments can only be made from accumulation interests (non pension) or by commuting a pension interest to pay out the lump benefit. The potential CGT issue is that if a SMSF asset is disposed from an accumulation account, 10% tax would be applied to the capital gain if the asset was held more than 12 months.
If the fund also had pension accounts operating during the financial year the property was paid out, this could reduce the CGT liability. SMSFs that operate pension accounts are entitled to receive a tax exemption on fund earnings. In some cases this could reduce the tax on earnings from the superannuation concessional tax rate of 15% to 0% (depending on the structure). SMSFs that operate pension and non pension accounts throughout the financial year (with unsegregated assets) are required to obtain an actuarial certificate to determine what percentage of the tax exemption the SMSF is entitled to. Members intending to transfer property out as benefit payment may want to consider commencing pensions at some stage in order to reduce the CGT liability.
Alternatively, if the SMSF was 100% in pension phase (no accumulation interests) for the full financial year, a partial commutation of the pension account to pay out the property immediately after the commutation could result in no CGT payable on disposal of the property. The member would have to be over 60 years of age and in receipt of an account based pension. The trustee/s of the fund may want to receive confirmation from an actuary that the SMSF is entitled to the full exemption on the fund earnings prior to the payment.
Depending on which state the property transfer occurs, there could be stamp duty implications. In some states if there is no change in beneficial ownership and no consideration on the transfer the stamp duty could be waived.
As you can see, there are a number of options and potential taxes or duties that members should be aware on when paying property out as a benefit payment. Members should seek professional advice to determine whether:
- A condition of release has been met;
- Commencing pension/s should be considered;
- Fund assets are segregated or unsegregated;
- CGT is payable or can it be reduced; and
- Stamp duty is payable and whether it can be waived
As you may already be aware, the government did announce on 5 April 2013 that they propose earnings on assets supporting pensions above $100,000 per year will be taxed at a rate of 15 per cent from 1 July 2014. If passed by government, this may cause additional tax to be applied if the gain on the disposal of the property pushes the earnings past $100,000. Note, the proposed changes do have transitional arrangements for assets acquired by the SMSF prior to 5 April 2013 where the capital gains of these assets will not count towards the $100,000 cap if disposed of prior to 1 July 2024.
Personal Property Security (PPS) Act
The first major decision concerning the PPS Act has now been handed down by the New South Wales Supreme Court.
Maiden Civil v QES  NSWSC 852 concerned unregistered leases of heavy equipment. The court found Maiden’s receivers were able to take possession of the equipment in question ahead of its owner, QES. The case confirms that it will not be enough for owners to rely on their title to personal property – they will need to register their security interests on the PPS Register, or risk losing their goods altogether.
We take this opportunity to alert you to the importance of registering the security interest on the PPS Register. You should also keep in mind that the two-year transitional period in which secured parties should register pre-existing security interests will expire on 30 January 2014.
We have people who can go over this with you.
SMSF Auditing Post June 2013
The last few years has seen a steady decline in the number of smsf auditors in Australia. During the same time the number of smsfs has continued to grow. From 1 July 2013 anyone wanting to audit an smsf, apart from meeting his/her professional body requirements, also has to be registered with ASIC.
Here at Youngs we have Auditors who we refer work to and are available by appointment. Should you have any queries please don’t hesitate to contact us on 03 5559 1444.
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