An SMSF investment strategy can enable a cash-strapped yet asset-rich self-managed superannuation fund (SMSF) to utilise its assets to benefit its members.
The term used for a non-cash benefit payment is an “in specie benefit”. This is where an 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 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 stated in TR 2013/5 that a pension is where a trustee is liable to pay a member a series of payments over a certain period. They have also stated that a single payment each year for some 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 considered a pension. Because of this, best practise 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 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, 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 and superannuation pension benefits, depending upon the recipient’s age and the components of the benefit. There are also different definitions of those benefits under income tax and superannuation laws; hence the confusion and why we urge you to discuss this with us before paying any in-specie benefits.
It does now, however, appear that the confusion in the superannuation industry as to whether an SMSF can make specie payments to members receiving pensions has now been cleared up.
Before paying an SMSF member in specie benefits, you must ensure that 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.
If you have any questions or concerns regarding your SMSFs, the Kreston Stanley Williamson team is here to assist you. Please don’t hesitate to reach out and contact us.
*Correct as of December 2014
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.