Earlier this year, the Government began moves to ban off-market transfers of assets to self-managed superannuation funds (SMSFs) from related parties. A related party of your SMSF broadly includes any other member of the SMSF, an employer that contributes to the fund by agreement (“standard employer-sponsor”), your relatives, partners, and companies where the member or standard employer-sponsor controls or significantly influences the company.
The proposed changes were going to require 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 (i.e. a share) they would need to be transferred on-market. However the Government considered the concerns of the SMSF industry that the proposed measures were going to excessively increase costs and compliance for SMSFs, and abandoned the proposed ban.
What is the benefit of related party transfers?
Related party transfers 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, with any earnings or capital gains from the investments taxed at 15% in accumulation phase and tax-free in pension phase. However, once these investments are in your SMSF they will be subject to the superannuation laws which restricts how they can be used.
So what assets can you transfer to your SMSF and how can you do that now?
Generally, as an SMSF trustee you are not allowed to acquire assets from a related party but there are some important exceptions to these rules which can help build your retirement savings. The three key exceptions are for:
- Listed securities
- “In-house assets”
- Business Real Property
An SMSF trustee can acquire a listed security, such as shares listed on the ASX, from a related party as long as the security is acquired for its market value. The market value requirement means that 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 is important to remember that if your SMSF acquires listed securities from you as a member of the SMSF, you will 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 SMSF’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 instance, an SMSF can acquire shares in the member’s brother’s business as long as 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 will be required detailing how the fund will sell any excess in-house assets over the 5% limit.
Business Real Property
An SMSF is allowed to 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, advice should be obtained from your tax adviser or financial planner before going ahead as the legislation relating to this is complex.
How can we help?
If you are considering transferring assets into your SMSF and require assistance or guidance to either determine whether the particular asset constitutes a related party asset in terms of the current legislation, or simply with fulfilling the transaction itself, please give us a call to arrange a time to meet so that we can discuss the most appropriate strategy for your particular circumstances.