Member status key for lump sums

SMSF in-specie lump sum payment

The status of an SMSF member may represent a bigger barrier to an in-specie lump sum payment than the underlying assets exiting the fund.

SMSF members looking to take an in-specie lump sum payment from their fund need to ensure they are eligible to do so and if the asset can correctly be transferred out of the fund, particularly in light of the government’s proposed tax on super earnings over $3 million.

Cooper Partners Financial Services director Jemma Sanderson said the issue of in-specie lump sum payments might become more common if the proposed Division 296 tax becomes law and SMSF members wanted to get their balance below $3 million.

“Some people might want to pay out benefits as lump sums if they’re eligible in order to benchmark down [below $3 million], or the fund might own residential property that’s always been rented out that they want to live in when they retire,” Sanderson said during a recent presentation hosted by The Auditors Institute.

“The big thing here is making sure that the person is eligible to receive a lump sum. Age 60 is not necessarily the figure to consider because at 60 payments can come out tax-free, but you’ve still got to be eligible to receive a lump sum payment, so this mean conditions of release need to be looked at.

“I’ve seen people fall foul of that all the time by thinking they will pull out half a million dollars, but they are still working for the same firm they have worked for 20 years and they have to satisfy a condition of release with a nil cashing restriction in order to access those benefits.”

She said another key factor was the valuation of any asset that forms the in-specie lump sum payment and while listed assets where easy to quantify, SMSF trustees and members should be cautious with unlisted assets and property.

“If you’ve got unlisted assets in there, so it might be a property trust, and you want to move it out of the fund, you’ve got to look at what is the valuation of that particular asset or unit trust or company. How do you value the shares in assets and all the units in that?” she said.

“That can be a real challenge when it is a business because what value is on that business? If there’s some underlying land you need to also review what the valuation methodology is for that particular company.

“That in itself can be a challenge and while market valuations of properties are generally easier to obtain, the valuation of active businesses can be quite an expensive exercise.”

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