In-specie payments – a tax trap!

Balancing home and savings

Withdrawing a residential investment property or other assets held by a SMSF is a strategy often favoured by trustees in pension phase.

The law as it currently stands, does not allow for pensions to be paid in anyway other than cash. On the other hand, lump sum payments can be made in cash or in-specie transfer of assets. The ATO has confirmed that a SMSF in pension phase can pay out a lump sum benefit concurrently with a pension by way of partial commutation. However, lump sum payments will not enjoy the similar tax concessions as pension payments. The Tax Office view is that the overall context of the benefits taxing provisions in the ITAA 1997 requires a distinction to be drawn between a lump sum and a pension payment.

Effectively, a lump sum can only be paid out of an accumulation balance of a member’s account. When the member’s account commutes to accumulation phase to enable a lump sum payment, the fund faces a capital gains tax liability when the assets are transferred out.

If the Fund is in 100% pension phase, all assets are segregated to paying a pension. Consequently, if any particular asset is commuted to accumulation and subsequently distributed in-specie, the trustees may be left with a hefty tax bill. Always an unpleasant surprise!

Therefore, the trustees should exercise significant caution and be prepare for the tax consequence of in-specie payments.

Summarised below is the distinguishing tax consequence for payments processed as pension and lump sum.

Lump sum VS pension

RELIANCE AUDITING SERVICES

Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations.Call: 1300 291 060 or email info@relianceauditing.com.au.

DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.