SMSF in-specie transfers and market value

What is an in-specie transfer?

It is a transfer of an asset itself instead of cash. The ATO describes an in-specie contribution as a contribution to the fund in the form of a non-monetary asset, and says a lump sum payment includes a payment made by asset transfer, known as an in-specie payment, if the fund's governing rules permit it.

Three situations come up most often:

• Into the fund. A member or other party transfers shares, units or other assets in as a contribution, or the fund buys an asset from someone.
• Out of the fund as a benefit. The ATO says a lump sum, including one from a full commutation, can be paid in specie if the governing rules allow it, and the trustee must consider any capital gains tax consequences.
• On a wind-up. The ATO says the trust deed may allow ownership of assets to be transferred to members rather than sold, and trustees should document how the assets were valued.

This article is about the valuation side. We do not give legal, tax or financial product advice.

Can an SMSF acquire an asset from a related party?

Generally no, with exceptions. Section 66(1) of the SIS Act says a trustee or investment manager of a regulated super fund must not intentionally acquire an asset from a related party of the fund. The ATO's investment restrictions page says a related party includes every member, their relatives and business partners, companies and trusts they control or influence, and standard employer-sponsors and their associates.

The ATO's guide to valuing SMSF assets puts the same point simply: permitted assets must be acquired at market value and, where relevant, are subject to the collectables and personal use asset rules. Whether a particular transfer fits an exception is a legal question for the fund's adviser. See related-party transfers.

Which market value applies, and on what date?

The market value at the time the fund obtains ownership. For an in-specie contribution, the ATO's ruling TR 2010/1 says the contribution is made when the fund obtains ownership of the asset, and that beneficial ownership can pass earlier than legal ownership. A contributor who argues for the earlier date must keep evidence of when it passed.

The same ruling says an in-specie contribution is reflected at its market value in the fund's accounts and the member's interest, so the amount of the contribution equals the market value, and the ATO applies the contribution caps at that value too. The ATO's valuation guide says collectables and personal use assets should be valued at the date of the transaction.

So for a transfer into the fund, the valuation date is the date the fund obtains ownership, not 30 June. If the fund still holds the asset at 30 June, it is valued again then for the accounts. Each additional valuation date: $495 + GST.

Market value means what a willing buyer could reasonably be expected to pay a willing seller at arm's length, after proper marketing, with both acting knowledgeably and prudentially.

What happens if the price is not market value?

Some or all of the income from the transaction may be taxed as non-arm's length income. The ATO says that if an asset is not acquired or sold at arm's length, all or part of that income may be non-arm's length income, and its page on how SMSFs are taxed says it is taxed at the highest marginal rate.

TR 2010/1 adds a specific case: where a fund buys an asset under a contract at less than market value, it has incurred non-arm's length expenditure under a non-arm's length dealing for the purposes of section 295-550 of the Income Tax Assessment Act 1997. The ATO also lists the actions it may take for breaches of the investment restrictions: penalties, making the fund non-complying, disqualifying trustees and prosecution.

None of this tells a trustee what to do. It shows why the price needs evidence.

Why does an independent valuation help?

Because shares and units with no quoted price need objective data to show the price was market value. The ATO's guide says to consider a qualified independent valuer for a related-party acquisition where the asset is a significant proportion of the fund or the valuation is likely to be complex, and that an approved SMSF auditor can seek an independent valuation.

The shares and units are usually the hard part: private company shares, and units in a private unit trust. A valuer independent of the fund and of the transferor values them at the transfer date, states the method, data and assumptions, and produces a report built to be used as audit evidence. We never value for a fund where the valuer is a member or related party of it.

Property held directly by your fund: we are not taking direct property valuations yet. If a trust or company owns the property, we value the units or shares using a property valuation you already hold. We never sign a property figure ourselves.

What should trustees settle before an in-specie transfer?

1. Is the other party a related party of the fund?
2. If so, does an exception apply, and does the acquisition keep in-house assets within 5%?
3. Does the trust deed allow the transfer? For benefit payments the ATO says it depends on the governing rules.
4. What are the capital gains tax and other tax consequences? The ATO says to consider them.
5. What is the market value at the transfer date, and what is the evidence?
6. Record how the asset was valued, who the parties were, the date and the amount. The ATO's wind-up guidance asks for these records.

We cover step 5. Steps 1 to 4 are for your lawyer, accountant or adviser. The ATO's wind-up page is at how to wind up an SMSF, and its benefit page is commutations for SMSFs.

What do we need to value an asset for an in-specie transfer?

• The proposed transfer date, and the parties
• For a company: the constitution, share register and recent financial statements
• For a unit trust: the deed, unit register and recent financial statements
• A list of the entity's assets and liabilities at the transfer date, with any property valuation you already hold
• Any recent sale or issue of shares or units

Documents come only through the private upload link on your matter, never by email. Investment entity (a company or unit trust holding property, cash or listed investments): $995 + GST. Trading businesses are priced by turnover on the pricing page. We confirm the fee in writing before we start. No hourly billing.