In specie benefits can be redirected

SMSF in specie benefit

An SMSF can redirect an in specie benefit payment to anyone chosen by a member, but this may not sidestep stamp duty or sole purpose test considerations.

SMSF members who are entitled to draw a lump sum benefit can direct it to another person, but need to be aware of stamp duty traps that may exist with in specie assets, according to an SMSF administration service provider.

Heffron client relationship manager Sean Johnston said the ability for an SMSF member to redirect an entitlement was determined in an appeal heard in the full Federal Court in 2003 related to a legal case from the previous year, Asgard Capital Management Limited v Maher, and this would also apply to any in specie benefit.

Johnston said Heffron recently dealt with an issue where an SMSF member met a condition of release and requested a property held in the fund be paid as the benefit to the member and their spouse.

“The case determined that once someone was entitled to a benefit and the trustee agrees to that and makes the payment, the member can direct it to another person.”

He said this redirection was not limited to spouses, but could also include family members, family trusts and unrelated third parties, and Heffron senior SMSF technical specialist Annie Dawson added it needs to be properly documented with a written direction from the member to the fund trustee.

“If someone was doing an in specie benefit, we would be looking for documentation, which the auditor will love as well,” Dawson said.

“We would advise checking the deed to make sure it allows for in specie payments and redirection of benefits, as well as checking market valuations, which may be needed for stamp duty calculations.”

Johnston said a written direction in this instance would be similar to a standard lump sum member minute, but with extra paragraphs that include the directions about paying it to the member and then directing it onto a third party.

“This process is about creating a present entitlement, making it known first to the trustee and then passing it on via the member, rather than just paying straight out to the other party,” he said.

He added that while the processes were straightforward, these moves could still trigger other superannuation and tax law breaches.

“There may be issues with the sole purpose test and if the initial investment had been made for the purpose of providing for retirement,” he said.

“There may also be stamp duty implications and I won’t comment on the implications of passing property from the fund to an individual to another person or trust compared with the benefit of going from the fund to the trust.

“We have seen people do this, but are uncertain around its success and advise members should talk to a stamp duty expert in their state.”

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