Property can be a real asset

There has been a surge of activity by those making undeducted contributions to superannuation in order to take advantage of the $1m transitional rule before 30 June 2007.

Significant benefits can be achieved by making an in-specie (non-monetary) contribution of business real property to a self-managed superannuation fund.

The process should be carefully managed to utilise stamp duty concessions that may be available (particularly in Victoria) and avoid unnecessary costs.

Business real property

If permitted by the SMSF’s trust deed, members can make an undeducted contribution of business real property to their SMSF. A complying superannuation fund is generally prohibited from acquiring an asset from a member: section 66 of the Superannuation Industry (Supervision) Act 1993.

However, a fund can acquire an asset that is 'business real property' and is acquired for market value. In general terms, a 'business real property' is one that is used wholly and exclusively in a business.

The property cannot be subject to a mortgage, so any mortgage must be discharged before the transfer.

In-specie contribution

When members make an in-specie contribution to their SMSF, the contribution should reflect the member’s ownership of the property.

For example, if two members own a property as joint tenants or tenants in common in equal shares, each member will be making an undeducted contribution of half of the value of the property.

The trustee should obtain at least two opinions of valuation of the property. Opinions of valuation generally provide a range, which can be used to determine the amount of the contribution.

The market value of the property must be reflected in the fund’s accounts. A member will be recorded as having made a contribution of their proportion of the market value of the property.

Property held in a trust

Many people are looking to make an in-specie contribution of property that is currently held in a family trust. However, property held in a family trust will need to be distributed to the individual before it can be contributed to their SMSF.

It cannot go directly from the trust to the SMSF without incurring stamp duty. (In any event, such a contribution would be a taxable contribution.)

In some jurisdictions, a stamp duty exemption will be available for the in-specie distribution to the individuals and the subsequent contribution to the SMSF.

An issue often overlooked is that the trust must have sufficient profits or capital to make a distribution without being in breach of the trust by causing a deficiency in the trust fund.

In many cases, the trust’s net assets are minimal. So, before you launch into action, it’s best to work out the accounting entries.

The distribution of the property must also be in accordance with the requirements and procedures set out in the trust deed.

When the same entity is the trustee of both the trust and the SMSF, the transfer from the trust to the individual, and then to the fund, must still be stamped (even if non-dutiable) and processed on title.

The transfers cannot simply be implemented by journal entries.

It is vitally important to demonstrate the chain of title so that an auditor of the SMSF or Tax Office auditor can see that the SMSF has proper title.

This requires proof that stamp duty was paid on the transfer of the property to the SMSF or the transfer was stamped non-dutiable on the basis that it was exempt.

GST – taxable supply?

There is no point saving a significant amount of stamp duty if you will be paying a more significant amount of GST. Accordingly, the GST implications of an in-specie distribution and a subsequent in-specie contribution should also be considered.

The tax commissioner takes the view that an in-specie distribution of property from a trust that is registered for GST to a beneficiary for no consideration can be a taxable supply.

For example, see GSTA TPP 049, ATO ID 2001/504, and ATO ID 2001/505.

In the commissioner’s view, the required elements of a taxable supply (section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)) are satisfied. The elements are:

• the supplier is registered or required to be registered for GST. If the trust is not registered or required to be registered for GST, the distribution is clearly not subject to GST
• the supply is connected with Australia – this is obviously satisfied because the distribution is Australian real property
• the supply is for consideration
  
  However, although an in-specie distribution from a discretionary trust is not for consideration, it can still be a taxable supply if Division 72 of the GST Act applies.
  
  Importantly, where a fixed trust or unit trust makes an in-specie distribution to redeem a unit holder’s/beneficiary’s interest or units, the redemption of the interest or units will be consideration for the distribution
• the supply is made in the course or furtherance of an enterprise that the supplier (that is, the trust) carries on – as discussed later, the commissioner glosses over this element

The distribution will not be a taxable supply to the extent that it is GST-free (farm land where the requirements of subdivision 38-0 of the GST Act are met) or input taxed.

Residential premises (the supply of which is generally input taxed) does not ordinarily qualify as business real property, so can rarely be the subject of an in-specie contribution to a SMSF.

But, when an entity carries on a business of leasing a number of residential properties, the properties may qualify as business real property.

Although the property will be used in a business, the distribution cannot qualify as part of a GST-free supply of a going concern because consideration, which is an essential requirement for a GST-free supply of a going concern, is not being provided. The beneficiaries of a trust are associates of the trust.

Accordingly, the commissioner suggests the in-specie distribution will be a taxable supply if the beneficiary is not registered or required to be registered for GST, or acquires the property for private purposes or to use in making input taxed supplies.

This is because subdivision 72-A of the GST Act provides that a supply to an associate for no consideration is a taxable supply if it would be taxable if consideration was provided and the associate would not be entitled to a full input tax credit for their acquisition because:

• the associate is not registered or required to be registered for GST
• the associate acquires the thing supplied otherwise than solely for a creditable purpose
  
  The final element required for the distribution to be a taxable supply is that the distribution must be made in the course or furtherance of an enterprise that the trust carries on. GSTA TPP 049 makes no mention of this element.
  
  The interpretative decisions on this topic state in the 'facts' that the distribution is made in the course or the furtherance of the enterprise. There is certainly an argument that this is not so, particularly where the trust is not terminating its enterprise.

As provided by the legislation and discussion in the commissioner’s ruling on the meaning of 'enterprise' (MT 2006/1), the trustee of a trust is only entitled to be registered for GST if it is carrying on an enterprise.

It follows that it is possible to have a trust that is not carrying on an enterprise. A trust that simply holds and distributes trust property and income to meet the needs of its beneficiaries and does nothing more would not satisfy the 'carrying on an enterprise' requirement necessary to register for GST.

Accordingly, distributions of trust property and income should not be supplies made 'in the course or furtherance' of the trust’s enterprise merely because the trust also happens to be carrying on an enterprise.

By contrast, under subsection 9-20(1)(da) of the GST Act, an activity or series of activities done 'by a trustee of a complying superannuation fund' do constitute an enterprise (see also subsection 9-20(1)(d)).

If all activities done by a trustee of a trust were meant to constitute an enterprise, the above provision could simply be extended to include all trustees.

It is apparent that either the legislation should be clarified if all activities of all trustees of all trusts are meant to be enterprise activities, or the commissioner should amend his view or provide further reasoning as to how and why an in-specie distribution is in the course or furtherance of the trust enterprise.

Although there may be some scope to challenge the commissioner’s view, getting a favourable outcome may take more time than you have available.

If the distribution from the trust is to beneficiaries who are registered for GST and those beneficiaries use the property in carrying on their enterprise (other than for the purpose of making input taxed supplies), Division 72 of the GST Act will not apply.

Consequently, the in-specie distribution will not be a taxable supply (this is confirmed in ATO ID 2001/503).

However, the beneficiaries must be carrying on an enterprise and must actually use the property in carrying on that enterprise. They should be registered for GST before the acquisition of the property.

If the individuals subsequently decide to contribute the property to their SMSF, the GST implications should be considered again.

Accepting for the moment the commissioner’s assumption that an in-specie contribution would be 'in the course or furtherance' of the enterprise carried on by the member (see ATO ID 2005/70, for example), the in-specie contribution will generally not be a taxable supply if the SMSF is registered (or required to be registered) for GST because Division 72 will not apply.

However, if the acquisition of the property by the SMSF relates to making supplies that would be input taxed or the SMSF is not registered or required to be registered, this issue should be contemplated more carefully as Division 72 may still apply.

Stamp duty

The various states and territories have stamp duty exemptions or concessions for the transfer of dutiable property from trusts to beneficiaries for no consideration.

Generally, the exemptions and concessions require that the beneficiary must have been a beneficiary when the trustee acquired the property, no consideration is provided for the transfer and the distribution is in accordance with the trust deed. However, some jurisdictions have more specific requirements.

The trustee should check the specific requirements of the relevant legislation before distributing property to a beneficiary.

A complete exemption from stamp duty is available in Victoria for transfers of dutiable property from trusts to beneficiaries for no consideration: section 36A of the Duties Act 2000 (Vic) for discretionary trusts.

Following recent amendments, Victoria probably has the most detailed provisions, and the exemption is now available for some distributions that previously would not have qualified.

The exemption can only apply where there is no consideration provided by the beneficiary and the transfer is not part of a sale.

Where the beneficiary gives a mortgage to secure at least the same amount as that outstanding under a mortgage over the property before the transfer, or assumes the liabilities under an existing mortgage over the property, the beneficiary will not necessarily be precluded from applying the stamp duty exemption because of the recent legislative amendments.

However, the beneficiary must discharge the mortgage before contributing the property to the SMSF.

A complete exemption from stamp duty is also available in South Australia and the Northern Territory: subsections 71(5)(e) and (f) of the Stamp Duties Act 1923 (SA) and items 9A(b) and 9A(ba) of Schedule 2 to the Stamp Duty Act 1978 (NT).

In Tasmania, New South Wales, Western Australia and the Australian Capital Territory, only a nominal amount of stamp duty is payable when the concession for the transfer of dutiable property from a trustee to a beneficiary is available:

• section 41 of the Duties Act 2001 (Tas)
• section 57 of the Duties Act 1997 (NSW)
• sections 73AA and 75 and item 6 of the Second Schedule to the Stamp Act 1921 (WA)
• section 58 of the Duties Act 1999 (ACT)

Although the requirements for these exemptions and concessions are similar across the various jurisdictions, do not assume that the requirements are exactly the same. Each revenue office has its own document-stamping requirements and each exemption has its own prerequisites.

Queensland is not a trust-friendly jurisdiction when it comes to stamp duty. Although there is a stamp duty exemption available for some distributions from trusts (section 123 of the Duties Act 2001 (Qld)), the application of the exemption provisions is very restricted.

One of the requirements in section 123 of the Duties Act (Qld) is that the distribution must represent the beneficiary’s trust interest. The legislation provides that only a taker in default of an appointment can have a 'trust interest' in a discretionary trust.

Accordingly, the availability of the exemption is already severely limited before the other requirements are even considered.

Additionally, the commissioner of state revenue must be satisfied that the dutiable property being distributed is the same property held on trust at the time the beneficiary acquired their trust interest or represents the proceeds of reinvestment of that property.

The beneficiary may find it difficult to prove this, as discretionary trusts are usually settled with a nominal sum of money as the initial trust property.

Further restrictions also apply to this exemption, such that it is rarely available. The Office of State Revenue has acknowledged this exemption hardly ever applies.

Stamp duty exemption

An exemption from stamp duty is available under section 41 of the Duties Act 2000 (Vic) where dutiable property is transferred by someone into their SMSF.

The State Revenue Office requires a number of documents to be lodged, including statutory declarations by both the trustee and the member confirming that the fund is (or within 12 months will be) a complying superannuation fund; the member is a beneficiary of the fund; and no consideration has passed between the parties.

The transfer must be an in-specie contribution rather than a sale. If any form of consideration is provided by the trustee for the transfer, the stamp duty exemption will not be available.

Unfortunately, Victoria is unique in relation to this stamp duty exemption. There is no equivalent stamp duty exemption in any other jurisdiction. When a member transfers property in any other Australian jurisdiction to their super fund, the transfer will be subject to stamp duty.

Interestingly, South Australia provides an exemption for a conveyance by an employer in certain circumstances: see item 1 in clause 4(2) of Schedule 2 to the Stamp Duties Act 1923 (SA). However, an employer contribution will not provide the same benefits as non-deductible contributions.

Capital gains tax

The distribution and/or contribution may trigger a CGT liability for the trust and/or the members. The CGT discount and small business concessions may be available to reduce the net capital gain.

In the long run, the concessional tax treatment achieved by holding the property in the SMSF may significantly outweigh the CGT liability the member incurs to get the property into their SMSF.

About the authors

Andrew O’Bryan is a partner and Rachel Bates is a lawyer at Hall and Wilcox.

This article constitutes the author’s opinion and not that of CPA Australia. It also does not constitute financial advice, and people should seek advice that suits their own circumstances.

Reference: April 2007, volume 77:03, p. 56-59

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