Real estate can be provided in kind to a member as a superannuation benefit. Prohibitions can apply to acquisitions of real estate from members but this prohibition does not apply going the other way. That is: from a fund to a member on a payment out of the fund as a superannuation benefit.
Still a condition of release needs to be met before a superannuation benefit is provided by a SMSF. Let us say that the fund is in pension mode and the member is over the age of sixty-five so a condition of release is met for a benefit to come from the member’s superannuation balance in the fund to the member.
Difficulties providing a real estate benefit from a SMSF in an income stream
A SMSF in pension mode must face these difficulties before releasing a benefit in the form of real estate:
- the Australian Taxation Office (ATO), if not the superannuation laws unequivocally, require that a pension (a superannuation income stream) benefit must be paid in money and not in kind;
- the benefit can take the SMSF out of pension mode, where the income of the SMSF is tax exempt on its earnings; and in to accumulation mode, where the fund is taxable at 15% on its earnings; depending on how the commutation of pension is done. This could inadvertently cause the capital gain, the SMSF makes on the disposal of the real estate as a benefit, to be taxable to the SMSF; and
- the SMSF may not have paid a minimum annual pension payment for the year as required by the superannuation income stream regulations.
Partial commutation solution
A partial commutation of a pension is a work around for these difficulties. A partial commutation of a pension is a commutation of less than the member’s pension balance in the fund as a lump sum. That is the member needs to have remaining member pension balance after the commutation. The ATO has indicated that a partial commutation:
- being a lump sum benefit, as opposed to a pension benefit, can be paid in kind. In other words, by payment of the property of the superannuation fund;
- does not lead to a cessation of the pension and so the SMSF can remain in pension mode and exempt from tax on its earnings including on capital gains; and
- can count towards meeting the minimum annual pension payment for the year: Self Managed Superannuation Funds Determination SMSFD 2013/2 but only up to 1 July 2017. The member will thus need to have a sufficient remaining pension balance in the fund to meet the minimum pension benefit from that date.
Doing it
There are a number of traps to implementing this solution:
- The governing rules of the SMSF must allow for partial commutations of pensions, the trustee must have a power under the governing rules to pay benefits in kind and the pension arrangements or agreement with the member must reflect this.
- The member needs to trigger the partial commutation and the benefit in kind in accordance with the pension arrangements or agreement.
- The trustee of the SMSF must value the real estate to ascertain the amount of the lump sum benefit being paid to debit to the member’s account.
- The member getting the real estate benefit must have a sufficient member account balance remaining after the debit to treat the satisfaction of the benefit in kind as a partial commutation of the pension.
- The fund and conveyancing documentation needs to be prepared on an arms length basis as required under superannuation law.
Although there is no capital gains tax if the fund remains exempt from tax in pension mode, other taxes and duties on a transfer of real estate can still apply.
For instance:
- GST can apply to the transfer of commercial premises or new residential premises from a SMSF where the fund is registered or is required to be registered for GST.
- Stamp duty liabilities vary significantly from state to state. Victoria has concessions on the transfer of dutiable property to a beneficiary of a trust. In New South Wales there is generally no relief from full ad valorem duty. A concession which applies in New South Wales on the transfer of dutiable property to a superannuation fund as a contribution does not apply to a transfer out the other way as a benefit.
Thus, to recap our disclaimer, partial commutation of a pension to provide real estate from a SMSF should be considered case by case and specific advice should be taken in relation to the above general comments.