Superannuation

Stamp duty is an expense that anyone who buys property through a do-it-yourself superannuation fund must take into account. It’s a state government tax that could apply at rates of up to 5 per cent of a property’s value if the fund wishes to eventually transfer this investment as a super lump sum benefit – even though stamp duty may have been paid on the acquisition of the property.

A reader asks about transferring a property in his super fund as a death benefit to his daughter. The fund is paying pensions to him and his wife, and it owns two investment properties plus shares.

Pension payments wait for no man

While rent from the properties and dividend income from the shares is sufficient to pay the pensions, he writes, he can see a time ahead where at least one property will need to be sold – along with some shares – to meet future pension payments.

If the fund gets down to the last member and it still owns one property then, on that member’s death, he asks if the property could be transferred as a death benefit to his adult daughter.

This is certainly possible, responds Deloitte Private superannuation director John Randall, but there is a range of issues that needs to be considered. These include possible capital gains tax and stamp duty on the property transfer, as well as withholding tax on the super entitlement.

Tax liability

There is a general belief that if a super fund no longer has any members and either sells investments to pay a death benefit or transfers investments as part of a death benefit payout, then those investments will be up for capital gains if they are sold at a profit. The tax will be calculated on the property cost base.

If it is a property with a market value of $500,000 and the capital profit is $100,000, then the CGT liability will be $10,000. This tax must be paid by the fund and will reduce the total benefit value to $490,000.

If the fund doesn’t have the $10,000 in cash, Randall says, the beneficiary (the daughter) could, if she has the money, pay this to the fund not as a contribution but as an offset against her entitlement.

A bigger tax liability

While this is one potential tax liability, arguably a more significant one is the possible withholding tax that must be paid on a super death benefit. This tax is levied on super that is classified as being a taxable super benefit because it was sourced from concessionally taxed super in the first place. Concessionally taxed super can be traced back to tax-concessional contributions made during the saving phase, as well as concessionally taxed investment income.

As a death benefit, a taxable super benefit is tax free if paid to a financial dependant, such as a spouse, but taxable at 16.5 per cent if paid to a non-financial dependant, such as an adult child.

If it is to be paid to a non-financial dependant, Randall says, tax must be withheld to cover this 16.5 per cent liability and if the major asset that remains in the fund is the property, now worth $490,000, the fund will need to find $80,850.

Again, if the daughter has this money she could come to the aid of the fund and treat the payment as an offset because her real entitlement from her parent’s super is what remains in the fund after the 16.5 per cent death benefits tax has been deducted. If the pretax benefit is $490,000, that leaves $409,150. If she receives that in the form of the property, she will have to make up the difference.

The stamp duty issue

This leaves the issue of potential stamp duty, which could be extremely important, Randall says, given there could be zero stamp duty on such a property transfer if it is done properly or double the stamp duty if it is not.

According to Andre Spnovic, an indirect tax partner with Deloitte, the ideal scenario is to pay no stamp duty on such a transfer, given the cost on the transfer of a $500,000 NSW property could be up to $18,000. Paying no tax would put it on par with an investment property owned outside super being transferred by a parent to an adult child. As long as the property to be transferred is included in the terms of a will, the property can potentially be received duty free.

For the same to happen in a DIY fund arrangement, says Spnovic, the fund trust deed must at the very least either allow, or certainly not forbid, a direct property asset transfer as a lump-sum death benefit.

Parental interest is key

Another important condition is being able to show that the parent is the only one who has had a relevant interest in the property at all times. Then, as a broad proposition, the property should be able to be paid as a death benefit free of stamp duty.

Given that the availability of stamp duty concessions will depend on individual circumstances, including the terms of the super fund trust deed as well as in which state the property owned by the super fund is situated, having the transaction checked by a tax specialist is well worthwhile. They will also be able to tell you how much tax you could be up for if there is a potential liability.