Using assets to pay superannuation benefits
Can an SMSF use its assets to pay a members’ superannuation benefit? Often an SMSF has plenty of assets but no cash. Or the member may want that particular asset.
A non-cash benefit payment is called an ‘in specie benefit’. So instead of paying the member in “cash” the benefit is paid by transferring an SMSF asset to the member. This is often shares and real estate. And of late, often a country estate or a holiday type property.
But what about if the member is getting an income stream. Instead of getting a lump sum payment the member gets pensions and annuities. Can the SMSF still make an in-specie transfer?
What is a ‘superannuation income stream’?
ATO Taxation Ruling 2013/5 states that an income stream is where a trustee pays the member a series of periodic payments. These are related to each other. It is over an identifiable time period. However, the payments need not be periodic. They don’t need to be paid at the same, recurring intervals.
Well then, is a single payment each year acceptable? Or must there be a series of payments? In our view, it is not acceptable. A single payment made in one year does not satisfy a liability to pay a series of payment. It is not an income stream.
In TR 2013/5 the ATO states that a lump sum superannuation benefit is payable in-specie. That is good news. But we knew that already. The definition of a ‘lump sum’ states that a lump sum includes an ‘asset’. Therefore, a lump sum superannuation payment is payable as cash or in-specie.
But an income stream superannuation benefit can’t be satisfied by an in specie transfer. Sad news. It all comes down to ‘commutation’.
What is ‘commutation’?
‘Commutation’ is not defined at law. Therefore, we look to its ordinary dictionary meaning. The Macquarie Dictionary states “to change (one kind of payment) into or for another”.
The term ‘asset’ includes cash, property, shares etc… A ‘lump sum’ is payable via the transfer of an ‘asset’. That is clear at law. However, no legislation directly states that an income stream is payable by an ‘asset’. The ATO seizes on the silence to argue that pensions are not payable in-specie. They are payable only in cash according to the ATO. See SMSF Determination 2013/2. The ATO has no court cases to justify the stance. The ATO’s bold comments are of course legally wrong. However, few of us have the resources to have the ATO’s views corrected by the Courts.
But does the SMSF Deed allow for in specie transfers?
Sadly, many superannuation administration companies use non-law firm websites to prepare their SMSF deeds. This is probably illegal. And the members don’t get any law firm Professional Indemnity protection. They are generally riddled with mistakes. One common mistake is a failure to allow an SMSF to make an in specie payment. You can update your non-law firm prepared SMSF Deed here.
What about Centrelink, CGT and Stamp Duty?
There is generally CGT, stamp duty and Centrelink issues. It depends on your age and pension status as to CGT. Duty, transfer duty or stamp duty is payable by the member acquiring the asset. Most States impose stamp duty on these transfers.
Example: Keith wants to live in his holiday home
Many years ago Keith purchased in his SMSF an estate in Byron Bay. The property has shown a lot of capital growth. It is now worth $4m. Together with $1m in shares, Keith has $5m of assets in his SMSF. He wants to move in. He is now old enough to get money from his SMSF. The SMSF transfers the estate out of the SMSF into Kieth’s name. The SMSF pays the CGT. Keith pays the stamp duty.
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Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
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