My client wanted to transfer a property out of a trust and into an SMSF without duty.
Legislative references are to the Victorian Duties Act 2000 (Duties Act).
There are 3 possible transactions:
- Transfer of property from a unit trust to beneficiary unit holder who is a trustee of a discretionary trust. Duty is exempted under S 36B.
- Transfer of a property from a discretionary trust to an individual beneficiary. Duty is exempted under S 36A.
- Contribution of property from an individual to their SMSF. Duty is exempted under S 41(1).
For this article, let us just consider 2 and 3 above.
Some issues that need to be considered.
- In specie distribution
Trust deed requirements
It is important to ensure that the trust deeds and SMSF deeds have the necessary provisions and powers in order to make the capital distributions and accept transfers of property as contributions. This includes that the relevant persons are beneficiaries of the trust, that the trust has the necessary power to make capital distributions and transfer of assets.
The distribution of property from a trust will often put that trust into a deficit. It is therefore important to consider how this can be rectified. An approach may be to revalue the asset to market value if it is recorded in the trust accounts at its historical value, and create a capital revaluation reserve from which to make a capital distribution.
Documenting the in specie distribution
The documents required to record the in-specie distribution of the property to the relevant beneficiary are:
- Minutes of meeting/resolution of the trustee of the discretionary trust resolving to make an in specie distribution of the property to the beneficiary;
- Written consent of each beneficiary regarding the in specie distribution of the property; and
- Documents required to transfer legal ownership of the property.
The distribution of property from trusts or the contribution of property to SMSFs will trigger CGT consequences where the property’s market value exceeds its cost base. Where applicable, such tax consequences could be reduced using the small business tax concessions.
If the discretionary trust is registered or required to be registered for GST, and the property is used in carrying on its business, the in specie distribution of the property will be a taxable supply even though no consideration will be received in connection with the disposal of the property under div 72-A of the GST Act.
Div 72-A provides that supplies between the trustee and a beneficiary of a trust, being associates, for no consideration are deemed to be taxable supplies if the beneficiary is not registered, or required to be registered for GST, or the beneficiary is not entitled to a full input tax credit on the acquisition.
On the other hand, if the trustee of the discretionary trust is not registered or required to be registered for GST, the in specie distribution of the property to the beneficiary will not be a taxable supply and GST will not be payable.
The transfer of the property should be exempt from stamp duty pursuant to S 36A of the Duties Act if the following criteria are satisfied:
(a) Any applicable duty levied on the purchase of the property by the trustee of the discretionary trust was paid at that time;
(b) The beneficiary was a beneficiary of the discretionary trust when the property was first acquired by the trustee of the trust;
(c) The transfer is to the beneficiary absolutely;
(d) The Commissioner is satisfied that the transfer is not part of a sale or other arrangement under which there exists any consideration for the transfer.
The documents to be provided to the State Revenue Office (SRO) include:
- Original transfer of land form;
- Copy of the certificate of title for the property;
- Copy of the stamped transfer to the trustee of the discretionary trust;
- Copy of the duly stamped discretionary trust deed together with any subsequent amendments; and
- Statutory declaration by the trustee of the trust.
In specie contribution
The final exemption that we will examine in this article is the exemption for transfers from an individual to their SMSF.
The requirements are set out in S 41(1) of the Victorian Duties Act 2000 (Duties Act). That section broadly states that no duty will be chargeable in respect of a transfer of dutiable property if:
- The transfer is made without monetary consideration;
- The contribution is made to a complying superannuation fund; and
- There is no change in the beneficial ownership of the property.
Business real property
Business real property generally means land and buildings used wholly and exclusively in a business.
A fund trustee can acquire business real property at market value under S 66(2)(b) of the Superannuation Industry (Supervision) Act 1993 without contravening the general prohibition on acquiring assets from related parties of the fund.
Acceptance of contributions
Contributions can only be accepted by an SMSF if permitted under the Superannuation Industry (Supervision) Regulations 1994. Those regulations restrict the acceptance of contributions by members aged 65 and over. For members aged between 65 to 75, non-concessional contributions can only be accepted if they satisfy the 'work test'; that is, during the financial year, members in that age group must work for 40 hours during a 30-day period. Members aged 75 cannot make non-concessional contributions.
Determining market value
The fund trustee must make a determination as to the market value of the property in accordance with superannuation law. The SRO is happy to accept a market appraisal from an estate agent, as long as it is not more than three months old. If the valuation provided is a range, as is often the case, the SRO will take the mid-point of the range.
Kenneth Ang, lawyer and accountant, K. Ang & Co