In End of year looms for super tax planning published in our June edition of Westlawn Monthly News we wrote of the government’s proposal to ban off-market transfers of assets into self managed super funds (SMSFs) from related parties.
Those proposed changes would have required SMSF trustees to obtain an independent valuation of the asset they were acquiring from the related party and where the investment was a listed security (ie. a share) they would need to be transferred on-market. However, following industry concerns the proposed measures would excessively increase costs and compliance for SMSFs, the proposed ban on off-market transfers has now been abandoned.
What’s the benefit of off-market transfers?
Off-market transfers from a related party allow you to shift investments you own into your SMSF. The benefit is that those investments will then be held in the low-tax superannuation environment. Earnings or capital gains from the investments would therefore be taxed at just 15% in accumulation phase and become tax-free in pension phase. However, once these investments are in your SMSF they’ll be subject to the superannuation laws which restrict how they can be used.
What assets can you transfer into your SMSF and how?
Generally, as an SMSF trustee you’re not allowed to acquire assets from a related party but there are some important exceptions which can help build your retirement savings. The three key exceptions include:
- Listed securities
- In-house assets, and
- Business real property.
An SMSF trustee can acquire a listed security, such as ASX-listed shares, from a related party if the security is acquired for its market value. The market value requirement means the SMSF must pay the related party a value for the securities that would be paid in an arm’s length or ordinary commercial transaction. It’s important to remember that if your SMSF acquires listed securities from you as a member of the SMSF, you’ll need to pay income tax on any capital gain you make on selling those shares to your SMSF.
Your SMSF can invest up to 5% of your fund’s value in “in-house assets”. An in-house asset is a loan to, or an investment in, a related party or trust of your SMSF or a lease arrangement with a related party or trust. For example, an SMSF can acquire shares in the member’s brother’s business provided the value of those shares does not exceed 5% of the fund’s total market value. If your SMSF exceeds the 5% limit, a written plan is required detailing how the fund will sell any excess in-house assets over the 5% limit.
Business real property
An SMSF can also acquire business real property, basically commercial or farming property, at market value without breaching any related party acquisition rules. Business real property must be:
- Real property – land and any improvements to it; and
- Used wholly and exclusively in one or more businesses carried on by any person.
Business real property may be transferred into an SMSF tax-free with the use of the capital gains tax small business concessions. However, you should obtain advice before proceeding as the legislation relating to this is complex.
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Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.
Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.