Getting true market value key to SMSF selling an asset

Whether an SMSF is buying or selling assets from members, the price must reflect the true market value of the asset.

Although the superannuation law prohibits certain assets owned by members being sold to or transferred into their self-managed super fund, there is no restriction on SMSFs selling assets to members. Whether an SMSF is acquiring assets from members or selling assets to members, the law requires that the purchase and sale price reflect the true market value of the asset.

Where an asset falls within the definition of “collectables or ­personal use assets” (for example: artwork, jewellery, antiques, artefacts, coins, postage stamps, memorabilia, wine, cars), the law requires SMSF trustees to obtain a valuation on the asset from an independent, qualified valuer prior to selling the asset to members at the recommended price.

The valuation of other assets can be undertaken by the SMSF trustee as long as these valuations are based on objective and supportable data. The trustee must also be able to demonstrate that the value arrived at was based on a reasonable process that took into account all relevant factors and is able to be explained to a third party, such as the SMSF’s auditor or the tax office.

There are many situations where SMSFs may sell assets to their members.

An SMSF may use an asset to pay a retirement benefit. A member may want to live in a residential property owned by their SMSF once they retire from em­ployment. An asset can be transferred to the member as an in-specie lump sum superannuation benefit.

By the same token, an SMSF may not have enough cash to pay out a death benefit. In this case an asset with an equivalent market value to the value of the deceased’s superannuation savings can be used to pay a lump sum death benefit to the deceased’s beneficiaries.

Incorrect borrowing arrangements generally mean that the transaction needs to be “undone”. An SMSF trustee may have structured a limited recourse borrowing arrangement incorrectly when acquiring a property. In order to remove the loan arrangement, the property can be sold to the member of the SMSF.

Contraventions of the superannuation law also need to be rectified and this may necessitate selling an asset. If, for example, an SMSF member renovates a property owned by their SMSF without charging the SMSF for the renovation, the increase in the value of the property is treated as a contribution and may exceed the member’s contributions caps. If the member does not want to incur excess contributions tax, then one option is to remove the property from the SMSF by acquiring the property themselves.

Cash flow problems can also be a reason to sell an asset to members, if an illiquid SMSF does not have enough cash to satisfy the minimum pension payment requirement for a member. In order to resolve the cash flow issue, the SMSF commutes part of the pension and elects for the commutation to be treated as a lump sum, and then pays the lump sum using assets in the SMSF.

SMSFs can sell assets to members but it is important to remember that the asset must be sold at its market value so that the SMSF is not disadvantaged and members are treated no more favourably than if the asset was sold on the open market.

Monica Rule is an SMSF specialist and author of the Self Managed Super Handbook: Superannuation Law for SMSFs in Plain English.

www.monicarule.com.au