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Self Managed Super Fund (SMSF) Article
Some In-specie contribution rule issues
By Tony Negline.
This article may be out of date.
3rd April 2007
The idea of moving assets into superannuation is a very hot topic at present because of the recent improvements to its concessional tax status.
There are two ways to achieve this objective. The first is to sell an asset and contribute cash into a super fund. The second is to transfer an asset into a fund and deem the sale price as a contribution. Within the super industry this second method is sometimes called, “inspecie”, that is in kind, contributions.
There are at least seven issues to consider before deciding to proceed with an inspecie contribution:
- Can you make contributions to super?
If you are under 65 then there are no restrictions on making contributions to super. Prior to July 2007, those over 64 but under 70 can make personal contributions and others, such as an employer, can make contributions for the person if they work for at least 40 hours in less than 31 days. For those over 69 but under 75 only personal super contributions can be made if they satisfy the same work test.
If the intention is to make undeducted contributions to super then any contributions above $1 million between 10 May 2006 and 30 June 2007 will be taxed at 46.5% unless the contributions are withdrawn by firstly contacting the ATO and requesting a form called a “Transitional Release Authority”. Once this form is completed it must be sent to your super fund.
- Can the super fund accept the asset?
Even though the asset is deemed to be a contribution there are still some restrictions on the type of assets super funds can buy from members, their relatives or entities that the members or relatives control or are deemed to control. The restrictions do not include property used wholly and exclusively in the running of a business, widely held trusts and managed funds and shares listed on the ASX.
- What tax concessions are available on the contributions?
If the contributions are going to be claimed as a tax deduction then there are restrictions on these contributions prior to July 2007. These restrictions are called Aged Based Limits. For this financial year the figure for those aged at least 50 is $105,113.
From July 2007 as new set of rules will apply for tax deductible contributions. Technically there will be no limit to the amount of contributions that can be claimed as a deduction. However the tax-rate that applies to the contribution will be very different. A flat dollar amount of $50,000 – indexed each year – will apply to all ages. A transitional amount of $100,000 will apply to those aged at least 50. Amounts above these thresholds will be taxed at 46.5%.
- If you put the money into super, when will you be able to get access to the proceeds?
Investments into superannuation must be left in the super system until the super rules allow it to be taken out. For most people this will be retirement. Investors born before July 1960 can access their money at age 55. Investors born after this date may have to wait until a later age. For example those born after July 1964 will not be able to access their super until they turn 60.
- What are the transaction costs?
By moving an asset from one entity’s name into a super fund there will always be expenses involved. Those expenses might be capital gains tax, stamp duty, land tax, GST, legal fees and so on. It might seem illogical the CGT will apply especially if an asset is being transferred from your name into your super fund. Regrettably this is based upon longstanding legal principle and could only change if the government amended the tax law. If the asset has been held personally then this CGT can sometimes be reduced by claiming a personal tax deduction. This option is available to those who are not employed or only receive a small amount of their total income from employment.
GST might apply if a GST registered business is selling an asset to another entity. Stamp duty typically happens with certain assets, such as property are deemed to have been sold.
- Does your trust deed allow inspecie contributions?
Some SMSF trust deeds only allow cash contributions to be made. It is essential you check your trust deed before beginning any transaction.
- How does the tax rate in super compare to your own tax rate?
If your taxable income is less than about $25,000 then most likely your ‘average’ tax rate will be below 15%. If this applies to you then holding an asset in your own name might be better. A key decision point might be the CGT payable when the asset is sold. For most people the super fund tax rate will be better longer term but it is important to do your sums.
- Make sure the transaction is done using an arm’s length price
Finally the super rules demand that super fund’s deal with all entities on an arm’s length basis. This means that if you intend to contribute an asset into the fund then it’s value must be based on an arm’s length price. Many trustees get this wrong.
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