Current as of December 2014
If a self-managed superannuation fund (SMSF) is asset rich, but cash poor it may be able to use its assets to pay benefits to its members.
The term used for a non-cash benefit payment is referred to as an “in specie benefit”. This is where a SMSF pays an entitlement to a member by transferring an asset such as shares or property to them instead of paying cash.
There is significant confusion about in specie benefits, so please discuss with us first.
The confusion is due to the different types of benefits that can be paid – lump sum vs. pension – and whether a commutation is required.
The Tax Office issued publications in July, 2013 that confirm that a lump sum benefit can be paid in-specie but a pension cannot.
The Tax Office has stated in TR 2013/5 that a pension is where a trustee has a liability to pay a member a series of payments over a certain period. They have also stated that a single payment each year for a number of years can also be a pension. However, a single payment made in one year will not satisfy a liability to pay a series of payments and thus will not be a considered a pension. Because of this, best practice would be to ensure that several pension payments are made, particularly in the year of commencement of the pension.
Commutation is not defined in either income tax law or superannuation law, but is generally accepted to mean “to commute or to change (one kind of payment) into or for another”; usually where an existing pension is commuted into a lump sum.
The Tax Office has also stated in SMSFD 2013/2 that where a pension is commuted to a lump sum, that the lump sum payment can be paid to the member either in specie or as a cash payment.
There are different tax treatments for superannuation lump sum benefits and for superannuation pension benefits, depending upon the recipients’ age and the components of the benefit. There are also different definitions of those benefits under income tax law and under superannuation law; hence the confusion and why we urge you to discuss this with us before you pay any in specie benefits.
It does now however appear that the confusion in the superannuation industry as to whether a SMSF can make in specie payments to members receiving pensions has now been cleared up.
Before paying a SMSF member in specie benefits you need to ensure that in specie payments are permitted under the trust deed. You also need to consider other implications such as CGT and stamp duty, Centrelink benefits, and income tax payable by the recipient. You also need to ensure that the pension is not a “non-commutable pension” like a transition to retirement pension.
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.