Can you sell your SMSF assets to a related party?

A common question SMSF trustees ask is whether they can sell or transfer their SMSF assets to a related party, like themselves or a family member.

Selling to related parties is possible

While there are rules about what assets an SMSF can buy from a related party, there’s no law that says you can’t sell or transfer SMSF assets, like property or shares, to a fund member or related party.

You can either sell the asset or transfer it from your SMSF to yourself as a member, provided you’ve met certain conditions (like retirement). This is called an “in-specie transfer,” which means the SMSF transfers its asset to you personally.

For an SMSF to sell or transfer an asset to a member or related party, the transaction must be done at market value and on an arms-length basis. This means the sale should be treated like a regular commercial deal, as if there’s no prior relationship between the parties. It’s crucial that the price reflects the true market value of the asset.

Why sell or transfer to a related party?

Superannuation law allows SMSFs to buy assets, such as property, through the fund. However, there are strict rules about how these assets can be used. According to the superannuation “sole purpose test”, your superannuation investments must be used solely to provide you with retirement benefits rather than providing you with current day personal benefits.

For example, if you temporarily stay or live at a property owned by your SMSF, it will fail the sole purpose test. This could lead to your fund losing its tax concessional treatment, and you could face fines or other penalties. To avoid these risks, trustees might choose to sell or transfer assets out of their SMSF to themselves personally.

Alternatively, for members who have retired and can receive their benefits, they can either receive their benefit in cash or by transfer of the fund’s assets. For instance, if a member requires a lump sum payment for a particular reason, say for a holiday, and the SMSF owns a parcel of shares, those shares could be transferred to the member’s personal name rather than the SMSF selling the shares and paying the member a cash payment. However, this type of payment could have tax consequences, so it’s best to seek advice about whether an in-specie asset transfer is appropriate for your personal financial circumstances.

Warning – special rule for members who have a pension and take a lump sum payment

The rules say that pension payments cannot be paid in-specie, that is, pension payments must be paid in cash and cannot be made using assets. So if you have a pension in your fund and want to take a lump sum from it (whether it is a cash or in-specie lump sum), this will not count towards meeting the “minimum pension payment rules” that require you to take a minimum amount each year from your pension account based on your age. So although in-specie lump sum payments from pension accounts are still permitted, a cash payment of the minimum required amount is also needed in order to satisfy the minimum pension payment rules. 

Things to consider

Before selling or transferring SMSF assets to a related party, keep these things in mind:

Selling or transferring SMSF assets to a related party is a valid option for many SMSFs. If you’re unsure about the tax implications or have any further questions, feel free to reach out to us for more information.

What is the right business structure?

If you carry on a business – small or large – the question of which business structure to use always arises – and not just from when you start that business, but also during its operation when it may be beneficial to change from one structure to another. 

Essentially, there are four major ways in which you can carry on a business: as a sole trader, in partnership, or through a company or trust – or even a combination of these (eg, in a partnership of companies and/or trusts).

Moreover, each has their own particular advantages and disadvantages – particularly when it comes to taxation consequences (and the benefits thereof). 

By way of a simple example, if you operate a business in partnership you have the legal problem of being “jointly and severally” liable for any debts of the partnership (ie, you can be personally liable for all the debts of partnership even if they were “incurred” by the other partner). 

On the other hand, there are not a lot of legal formalities to comply with (unlike a company) and, moreover, from a tax point of view you can generally split the income from the business with the other partner/s in the most tax advantaged manner.

Furthermore, and something that is often forgotten, any tax losses made by the partnership can be attributed to the partners – and can be used to reduce tax on their other income. This may be particularly useful in the early stage of a business when losses are more likely to be made.

This is unlike companies and trusts where the losses remain “locked” in the company or trust until such time that there is income against which they can be offset. And even then there are complex rules that prevent such losses being used in this way if, for example, there has not been underlying “continuity in ownership” of the company or trust.

On the other hand, family trusts at least do in effect allow flexible “splitting” of the income or profits made by the trust in a tax-effective way. And companies and unit trusts also allow the same – but in a somewhat more rigid manner.

However, the key point we seek to make is that you can change the structure of your business at any time in its operation – and in regards tax, you can do so usually without any adverse tax consequences because of the various concessions and roll-overs that allow you to do so.

For example, if you have been running your business as a sole practitioner or in partnership you can roll-over your business (ie, the assets that comprise it) into a company or trust without there being any adverse tax consequences. 

Of course, this is subject to meeting certain eligibility requirements – the main one of which is that you remain the beneficial owner of the business in that you remain the controller of the business in the same way you were before the “roll-over”.

And this is just at the simple end of this type of roll-over. In fact, the roll-over provisions now allow you to even roll-over a small business from whatever structure into a discretionary trust structure (with all its tax benefits). But again this is in effect subject to the same “continuity of beneficial ownership” existing both before and after the roll-over.

Finally, and crucially, even in the event you trigger a capital gain on restructuring a small business, the CGT small business concessions should apply to allow you to eliminate or greatly reduce the assessable gain – and to roll-over the gain into buying assets for a new business.

If you are running a small business, and think it is time to do things a bit differently (at least from a tax perspective!) come and see us to discuss all the options and all the advantages and disadvantages of a particular structure. 

Likewise, if you are thinking of starting a business for the first time, come and speak to us to work out what type of structure would best suit you at the start of your entrepreneurial adventure.

Buying a new home before selling the old one

There are many different issues to be considered, and matters to be juggled, when buying a new home eg, financing, storage of furniture, etc – and timing, of course.

But a common issue is whether you should sell your existing home first and then buy – or buy first. (Most “experts” say you should sell first.)

But if you are caught in that situation (or choose to be in that situation) where you buy a new home first there is an important tax rule to consider.

And this centres on the capital gains tax (CGT) rule that you can’t have two CGT-free homes going for the same period or at the same time. 

And where you buy a new home before selling the old home you technically have two CGT-exempt homes running at the same time – for which, in principle, you cannot get a full CGT exemption when you later sell one or the other.

However, there is an important CGT concession that can help you in this case – and it is the “changing main residence concession”.

This broadly grants you a six month period in which both homes will be entitled to the full CGT exemption for your home. 

In particular, it allows you to claim a full CGT exemption on your original home provided you sell it within six months of buying the new home – even if you have lived in the new home as your main residence for much of that six month period.

In other words, it allows you a six month overlap period to treat both homes as your CGT-exempt main residence.

However, the practical application of the rules can be complex.

For example: 

You may think that this is one of those tax rules that the ATO does not pay a lot of attention to – and you may be right. Nevertheless, it is still the law of the land. 

Riding the market waves

Don’t let share market volatility get you off course with your superannuation investment strategy. 

Market volatility 

Market downturns can make anyone nervous, but sticking to your investment strategy is key.

If you move your investments to cash or a more conservative option after the market has fallen, you’re effectively locking in your losses. Decisions driven by fear are rarely the right ones, and acting impulsively can be costly. It is also very difficult (if not impossible) to correctly time the market, so if you’re planning to switch back to growth assets before the market recovers, this might see you miss out on the rebound.

A more optimistic view of a falling market is that your regular superannuation contributions are buying assets at a lower price. When the market eventually recovers, those assets purchased during the downturn can significantly increase in value. 

Don’t panic and stay the course

Riding the ups and downs of financial markets is an inherent aspect of investing.

Although market volatility can be stressful, particularly for those nearing or in retirement, it’s crucial to keep a long-term perspective and stick to your investment strategy (assuming it still meets your needs). Even those approaching retirement, or already retired, still have many years of investing ahead. 

And if like most people your superannuation benefits are invested in a balanced or growth option, diversification plays a key role in shielding your balance from extreme market swings. That in turn allows you to have a diversified position and be confident that your superannuation can stay the course over time.

For those in a large APRA-regulated fund, most funds have pre-mixed diversified options for you to choose from. Otherwise if you have your own SMSF, you’ll need to ensure your investment strategy factors in a range of requirements such as diversification, the risk and return in making investments, and so on. As trustee or director of your fund, you will need to manage this yourself or seek advice from a licensed financial adviser who can assist you in developing a compliant strategy that is tailored to your fund and members’ circumstances. 

But if market volatility continues to keep you up at night, it might be wise to check your investments and superannuation balance less often. By focusing on the long-term rather than daily fluctuations, you’ll have a clearer perspective on your financial progress without unnecessary worry.

The last word

As the investment saying goes, “it’s not about timing the market, it’s about time in the market”. The key takeaway is to stay patient, adhere to the fundamental principles of diversification and asset allocation, and as always, don’t hesitate to seek advice if you need it. 

Who is a spouse under the tax laws, and why does it matter?

While Australia doesn’t have a joint filing option for married couples, there are some aspects of your individual tax assessment that depend on your spouse’s income.

For example, your eligibility for the private health insurance rebate and your liability for the Medicare Levy Surcharge both take into account your spouse’s income. Other tax attributes affected by your spouse’s income include the senior and pensioner tax offset, the Medicare Levy reduction for families, the zone and overseas forces tax offsets, and the invalid and invalid carer offset.

Under Australian tax law, a spouse is a person (of any gender) with whom you were in a relationship that was registered under a prescribed State or Territory law, or not legally married, but who lived with you on a genuine domestic basis in a partnership as a couple.

So, spouses are either legally married or living in a de facto relationship under the same roof. Note the additional requirement for cohabitation for de facto couples, which is in itself evidence of the relationship.

Sounds simple enough, but here are some commonly asked questions about spouses:

What about overseas marriages?

Many marriages for Australian residents took place in other jurisdictions. The Marriages Act has reciprocal provisions and most overseas marriages are recognised in Australia.

What if my spouse is still a foreign resident?

Sometimes visa requirements prevent both spouses from entering Australia at the same time. Where this occurs and the parties are legally married, the foreign partner is regarded as a spouse. All their global income needs to be disclosed in the Australian tax return of the resident partner. Where the parties are in a de facto relationship they are not cohabiting and the foreign partner will not be treated as a spouse under the tax rules.

What if I don’t know my spouse’s income?

You might need to lodge by 31 October, but your partner runs a business and uses his tax agent’s extension to lodge by the following May. Or you and your partner may be going through a difficult separation and the communication process is far from ideal. Make your best estimate, based on what you know about their affairs. If you have acted in good faith you won’t be penalised for getting it wrong, although the Tax Office might adjust your return down the track.

What if my relationship lasted for less than a year?

Most people don’t start or finish relationships on 1st July. There is space on your tax return to indicate when you have started or finished a spousal relationship part way through the year of income. The Tax Office will pro-rate the various tax rebates or surcharges as necessary.

What if I am separated but not divorced?

Couples who are legally married but who subsequently separate continue to be spouses until their divorce is finalised. On the other hand, couples who were in a de facto relationship but who subsequently separate cease to be regarded as spouses from the time they are no longer cohabiting.

Does cohabiting need to be full-time for a couple to be regarded as being in a de facto relationship?

Some couples prefer to maintain their own respective households while engaging in a co-dependent intimate relationship with another person. They might spend a number of nights together at either one of their homes but also spend time apart, which gives them independence and makes their relationship work.

These things are a question of fact and degree. If the couple spend most nights together at one place or the other and conduct themselves as a couple they might be regarded as being in a de facto relationship.

If they were legally married this would not be an issue, as they would be regarded as each other’s spouse regardless of how much time they spend apart. Perhaps not the most romantic reason for popping the question, but marriage would sort out any tax uncertainty there might be.

Inheriting assets other than a home

Most people know that if they inherit a home and it is sold within two years of the deceased’s death, then they won’t pay any capital gains tax (CGT) on it.  And there are other ways an inherited home can be sold CGT-free.

But what about other inherited assets – such as a car, shares, vacant land – or even jewellery or artwork.

Well, for a start there is no CGT-free exemption for these assets if they are later sold by the beneficiary who inherits them (or if they are sold by the executor in the course of the administration of the estate). 

However, some such assets will be exempt from CGT on any later sale because they are an asset that is not subject to CGT in the first place. Typically, this will include an ordinary car – or even a vintage car.

Otherwise, most inherited assets other than “purely personal” assets (such as ordinary books, furniture and clothing, etc) will be subject to CGT on any later sale. And this includes assets that the deceased may have acquired before 20 September 1985 which would not have been subject to CGT if they had been sold during the deceased’s lifetime. 

Nevertheless, where a person is subject to CGT on an inherited asset, they will be deemed to have acquired it for the same cost that the deceased paid for the asset – in the case of assets that the deceased acquired after 20 September 1985. This means they will calculate any capital gain or capital loss by reference to that “deemed” cost.

On the other hand, if the deceased acquired the asset before that date they will get a cost equal to the asset’s market value at the date of death of the deceased – which usually means that there will be less CGT to pay on any sale of the asset.

In either case, the beneficiary gets the advantage of getting a “deemed cost base” for the asset for the purposes of calculating any CGT for an asset they acquire without having to pay anything for!

Furthermore, in the case of assets that the deceased acquired after 20 September 1985, if the combined period of ownership of the asset by the deceased and you as the beneficiary (plus the period when it was held by the executor) is greater than 12 months, then any capital gain you make is also usually entitled to the 50% discount to assess only half of the gain.

But if the deceased acquired the asset before that date, then the asset must have been owned by you (and the executor if relevant) for at least 12 months to be eligible for the CGT discount.

In the case of inherited shares, it will be necessary to work out the specific cost base of every share  – and this may be difficult if there have been shares acquired under a dividend reinvestment plan or share splits or amalgamations, etc on any restructure of the company. 

It should also be noted that while “purely personal” assets (eg, books, furniture, etc) won’t be subject to CGT on any later sale by a beneficiary (because like cars, they are generally exempt from CGT) there is a special category of personal assets known as “collectables” which are subject to CGT during the lifetime of the deceased and in the hand of the beneficiary.

And these collectibles include such things as artwork, jewellery, antiques and coins or medallions. 

But the key thing is that they retain their character as “collectibles” in the hands of someone who inherits – and therefore the special rules that apply to them also applies to a beneficiary who inherits them. For example, they have their own special rules to determine their cost in the hands of the original owner – which carries over to a beneficiary who inherits them.

Whether a person who inherits a “collectible” pays any attention to these rules (or even knows of their existence) is another matter. And the sale of a collectible is a hard thing for the ATO to chase up – as opposed to land.

But suffice to say, these CGT rules exist – and they are the law of the land.

Finally, if a beneficiary is a foreign resident of Australia for tax purposes and they inherit assets from a deceased person who was an Australian resident, then different rules will apply. 

Essentially, the deceased person will be deemed to have sold the assets just before their death and will be liable for CGT themselves in their final tax return. However, this rule is subject to important exceptions – such as for inherited land in Australia. 

So, dealing with inheritance of assets is not a straightforward matter. But it also affords the opportunity to plan and time things so as to reduce any potential exposure to CGT. 

And, we are to help in any stage of the process.