Have you ever needed to move your investments around but dreaded the hassle of selling everything first? That’s where “in-specie transfer” comes in!
Instead of the traditional sell-and-buy dance that triggers taxes and paperwork, in-specie transfer allows you to simply transfer your investments directly, just like moving furniture between rooms in your house.
In this guide, we’re going to break down the ins and outs of in-specie transfers for small business owners. We’ll take you through the benefits, spell out how it works, and help you see how this financial move could give your business an extra edge.
What does In-Specie Transfer mean?
In-Specie, from Latin, means “in its actual form.”
An in-specie transfer is a financial transaction where assets, such as investments or property, are moved directly from one account or entity to another without being sold or converted into cash first. In other words, it’s like shifting your belongings from one room to another in your house without selling them off and then buying new ones.
This type of transfer is often used in investment and financial management strategies to achieve specific goals. For example, an investor might want to move shares of a company from one investment account to another without selling them. This can be done to adjust their portfolio’s composition and tax implications or to optimise their investment strategy.
In the context of small businesses, an in-specie transfer could involve moving assets between different business accounts or even between the business and its owner. This can be useful for various reasons, such as optimising the tax structure, separating business and personal assets, or reorganising the company’s holdings.
An in-specie transfer provides a way to move strategic assets without liquidating them, which can help manage taxes and maintain the desired investment or business structure.
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What are the benefits of In-Specie Transfer?
There are various benefits of in-specie transfer, namely:
- Tax efficiency: In-specie transfers allow you to move assets where there is no change in beneficial ownership without triggering immediate capital gains tax, unlike traditional sales. This makes them ideal for investors wanting to avoid tax burdens during internal portfolio restructuring.
- Cost savings: Avoiding the sale and repurchase process may save on brokerage fees, transaction costs, and market volatility that might affect the asset’s price.
- Ownership structure: For businesses, in-specie transfers enable shifts in ownership or asset distribution without cash transactions, preserving liquidity.
- Asset allocation: This approach allows easy redistribution of assets across accounts or investments to match evolving financial goals or risk tolerance.
- Preserve investments: In-specie transfers let you keep the same assets intact, bypassing potential losses from market fluctuations during a sale and repurchase.
- Simplify processes: By directly transferring assets, you eliminate the need for multiple steps (sell, repurchase), streamlining the transfer of ownership or investments.
- Time efficiency: These transfers can often be faster than liquidating assets and repurchasing them, enabling quick action on investment decisions or strategic changes.
- Personalisation: The flexibility of in-specie transfers allows you to fine-tune your portfolio to align with your specific financial preferences, such as maintaining preferred stocks or property holdings.
- Strategic planning: In-specie transfers offer a strategic tool for financial planning, helping you optimise portfolio performance while considering tax, asset structure, and long-term growth objectives.
Tax implications of In-Specie transfers
While in-specie transfers offer tax advantages, they come with specific tax implications that need to be carefully assessed:
- Capital Gains Tax (CGT) implications:
Even though no sale occurs, an in-specie transfer can trigger CGT, especially if the asset’s value has increased since it was first acquired. For instance, when transferring property or shares, the capital gain is calculated as the difference between the asset’s market value at the time of transfer and its original purchase price.
The taxable gain must be declared in the tax return of the individual or entity making the transfer. This applies even if there’s no cash exchange.
Example: If an individual bought shares for $50,000 and they are now worth $80,000, the in-specie transfer would trigger a capital gain of $30,000. This gain would be subject to CGT based on the individual’s marginal tax rate.
- Stamp duty liabilities:
In some cases, especially when property is involved, stamp duty may also apply to in-specie transfers. Stamp duty is typically calculated on the current market value of the asset at the time of transfer. The amount can vary depending on the state or territory in Australia where the transfer takes place, so investors must check local stamp duty laws.
Example: A property valued at $500,000 being transferred via in-specie could attract significant stamp duty based on the jurisdiction, potentially ranging from 3% to 5%, resulting in up to $25,000 in duty.
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Superannuation and In-Specie transfers
You might be familiar with the idea of contributions to your superannuation account. However, it is also possible to make an In-Specie transfer of the asset directly into your superannuation account without realising the asset in cash.
This commonly occurs with self-managed super funds (SMSF) but is also possible for traditional retail and industry super funds. An SMSF allows the individual, as trustee, to manage their own super accounts rather than a fund manager.
In-Specie Transfer to SMSF Accounts
The In-Specie transfer of assets into an SMSF account is sometimes known as an “off-market transfer.” Rules restrict the assets that may be transferred into an SMSF.
According to the ATO, the following can be transferred In-Species into your SMSF account: ASX-Listed securities, commercial property, and cash-based investments like bonds. When the transfer is made, you can declare the transfer as a contribution or an asset sale. In both cases, the purchaser is the SMSF. In the case of the asset sale, the SMSF is then required to transfer the purchase price to you according to market value.
Transferring assets to your SMSF account can have tax benefits. The transfer can reduce how much you pay in income and capital gains tax on the asset in question. Depending on the size of your SMSF, its tax rate falls as low as 0% once you retire and begin to receive a pension from the super account. However, there are also some disadvantages to transferring assets to your SMSF account.
The asset is trapped in your SMSF account until you reach above 60 if you retire, or 65 regardless. You must ensure that you do not require the asset until that age. Where there is a transfer of commercial property, stamp duty will be required to be paid. This can be a significant cost, and thus, the transfer of the asset must not be hastily made. However, there is no stamp duty to be paid on share transfers.
In-Specie Transfer out of SMSF Account
Assets can also be transferred out of the SMSF account once retirement age is reached. The transfer may be In-Specie or by selling the asset and then transferring a lump sum payment.
You might choose to buy a property for your retirement while you are currently working and transfer it In-Specie to the SMSF account. When you reach the retirement age, you will need to take the property out of the fund. If you transferred the property as an asset sale, with the fund as the purchaser, you must pay a purchase price to recover the property from the SMSF account.
Legal and compliance considerations
For in-specie transfers involving SMSFs, trustees have critical legal obligations. They must ensure that assets transferred meet the ATO’s SMSF investment rules, including the “sole purpose test” (using assets for retirement benefits).
Accurate asset valuation is required to avoid compliance breaches, and this must be done according to market value at the time of transfer. The ATO monitors SMSF compliance, requiring proper documentation and adherence to rules governing non-cash asset transfers.
Failing to meet these requirements can lead to penalties and disqualification of the SMSF’s tax-concessional status.
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Conclusion
The process of In-Specie transfer into and out of the SMSF account can be very complicated. Determining whether the transfer should be made is itself a complex decision.
Luckily, Lawpath’s lawyers can assist you in navigating the rules and regulations with ease. Get a free quote when you hire a lawyer from our marketplace.
FAQs
How is CGT calculated on an in-specie transfer?
Generally, in-specie transfers don’t trigger CGT unless there’s a change in beneficial ownership. For example, if you transfer shares worth $50,000 that you bought for $30,000 to your SMSF, you’ll need to pay CGT on the $20,000 gain since the ownership changes from you to your fund.
Can I transfer managed funds in-specie to my SMSF?
Yes, you can transfer managed funds to your SMSF, but they must be transferred at market value and comply with contribution caps. The transfer needs to follow your fund’s investment strategy and meet the ATO’s contribution rules.
What are the main tax implications of in-specie transfers?
In-specie transfers between your own accounts typically don’t trigger tax events, but transfers changing beneficial ownership (like moving assets to an SMSF or trust) are treated as disposals for tax purposes. The key is whether beneficial ownership changes – if it does, expect CGT implications.
