Have you ever wondered what in-specie, in specie, and in specie mean? It is the transfer of ownership of an asset without selling the property, called in-specie transfer. The process avoids the usual way of selling and buying the interest to specific property or assets, which can bring unforeseen costs and the diminish the value of the assets. An in-specie transfer assists in negating the impacts of the traditional process. In other words, it is the process of transferring an asset, like a gift. The term has been derived from Latin, which means ‘in its actual form’. For some people at certain stages in their lives, it is important to consider the implications of incorrectly, transferring valuables that can reduce their future value. That is why an in specie transfer is an important legal device for those that wish to transfer their assets whilst minimising risks. Read this Legal Kitz blog to find out more.
If there is no change of legal ownership, who benefits?
Before going any further in discussing the nature of an in-specie transfer, it is necessary to understand the fundamental element, that is no legal change of ownership in the transfer of property. This means that no cash, and no sale actual sale of the asset occurs, however, at stages the process of transferring will come close to this. Where an individual or trustee decides to pass on the ownership of the property after the transfer has been completed, the trustee is still the legal owner. Nothing material has changed at this point.
So, what exactly changes?
The beneficial ownership changes, before the transfer of ownership. The trustee or property owner was both the legal owner and beneficial owner of the asset. After the transfer, the beneficial interest passes to the individual, trustee, or corporation as the beneficial owner. This means that the new individual, trustee, or new beneficial holder of the property is to only hold the property for the benefit of the original owner. In other words, they are to hold the property consistently with obligations like a fiduciary relationship.
When is in-specie transfer used?
The most common uses for in-specie transfer are in and out of Self-Managed Super Funds. Note, the principle of the in-specie transfer can be seen as a simple endeavour to help manage assets, however, the process can become very complex.
To transfer property into the SMSF properly you must follow the directions of the Australian Taxation Office. They determine that only certain types of properties and securities can be transferred. The website provides the following: ASX-Listed securities, commercial property, bonds, and other cash investments.
Importantly, there is a different methods of transferring ASX listed securities, through an off-market transfer, or a contract for sale that must be executed. Before you decided to transfer your asset or property into an SMSF, you must consider whether you’ll need to sell the property soon, as once the property has been transferred in the SMSF, the asset cannot be touched until the interest holder reaches the age of 60. Unfortunately, taking an asset of SMSF can significantly reduce the underlying investment in the asset, and lose the returns on the investment to the costs of administration.
The major advantage of transferring property into an SMSF is once an individual reaches the age of 60, the income and capital gains tax significantly reduces. Further benefits apply after retirement, as there will be no tax charged on the asset in the SMSF.
How does the transfer occur?
The transfer of the property occurs in two ways, by a contribution or an asset sale. At the start of both processes, the SMSF becomes the purchaser or receiver of the property. They then must provide a transfer purchase price of the asset according to the market value of the asset. A key understanding about transferring using an in-specie method is that it is only useful when the assets are not needed, and the individual can afford to effectively leave the asset to grow. If commercial property and other assets are constantly taken in and out of the SMSF, then stamp duty and other costs will need to be paid. Therefore if you want to transfer your assets through an in-specie transfer, you must be prepared to set, forget, and let the asset grow.
What happens to superannuation?
Individuals who use superannuation funds can also use the in-specie transfers to contribute or transfer assets. The asset will simply be transferred to a fund using the off-market transfer process, which avoids liquidating the asset into cash to complete the transfer. The case of superannuation funds is not as common as the SMSFs. However, the process can be favourable for minimising tax. Importantly, superannuation funds are limited to specific types of property or assets that can be transferred. Superfunds must avoid holding property from a related party however such an occurrence is very uncommon.
What is a common case of in-specie?
Say an individual purchased a second house ten years ago. Since then, they have negatively geared the asset. Now the house is paid off and the individual wants to avoid paying the extra tax on the rental income. An effective way to avoid this is to contribute the house to SMSF, by way of an in-specie transfer. This allows for substantial savings, such as avoiding costly stamp duty fees and other costs that are involved with realigning asset ownership and management. It stops asset from having its value diminished from being exposed to market forces, which makes tracking the value of the asset a more difficult task.
What does in-specie out refer to?
Once an individual has reached retirement age, they can use the same process to transfer the interest of the property, to recover or transfer out the asset. In the example above say the individual has decided to transfer the property out of their SMSF. They must pay the agreed purchase price for the property that was made when the property was first transferred to the SMSF. This will return both the legal and beneficial ownership to themselves having avoided the capital gains and other tax associated with full beneficial ownership.
Legal advice
If you require further assistance with any information related to in-specie transfer, you should seek legal advice.
Legal Kitz can assist with ensuring that your concerns are addressed, and can provide you with advice that is tailored to your situation.
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