Individuals in an SMSF can receive an in-specie benefit payment even where their balance is less than the asset involved if another member also receives the same payment and partially redirects it to them, according to a technical specialist.
Heffron senior SMSF specialist Annie Dawson said such payments were possible, but required instructions to the fund trustee informing them of the request for the in-specie benefit payment and how it should be split and directed on exiting the fund.
Dawson gave the example of two SMSF members aged over 65, John and Rachel, who had unrestricted benefits and want to take a property worth $1.8 million held in the fund as an in-specie benefit. After the transaction, they would hold the property in their own names as joint tenants, but John only had a balance of $600,000, while Rachel had a balance of $1.2 million.
“Are they allowed to agree on how the property is split between them and does it matter if the split exceeds their individual entitlements?” Dawson said.
“The way to think about this question is to break it down and think about what is actually happening.
“The first thing is that the members are saying: ‘Can I have a benefit please?’ and in this case they are asking for their benefits to be cashed.
“The other thing that is happening is they are contracting with the trustee to buy the property.
“As such, we would expect to see a sale contract to document the members have offered and the trustee has agreed to sell the house for market value at $1.8 million, with the fund being owed $1.8 million for the house and the members owed $1.8 million for their benefit payments.”
She said this scenario meant an agreement must be put in place to set those obligations off against one another and this is where the benefit split and redirection would be involved.
“As we said, John is going to get a 50 per cent share in the house, but his balance is only worth $600,000, but because Rachel is going to call on her benefit of $1.2 million, she is allowed to give a payment by direction,” she added.
“Rachel is allowed to tell the trustee: ‘When you are paying my member benefit, I want you to pay $300,000 of it to John,’ and then she’s going to describe what it is – a gift or maybe book it up as a loan.
“Either way, we have to identify what that $300,000 will be, which acknowledges that we won’t be breaching the super laws because John gets an extra $300,000 because Rachel was allowed to tell the trustee how she would like her member benefits to be paid to her.”
