Illiquid Assets in SMSFs – Strategies in Retirement

Author: Emma Partenza, Manager, TAG Financial Services

As our superannuation clients get older and their health starts to deteriorate, members start to consider their options with their SMSF. This tipping point seems heightened now, as we have been fielding questions from accountants, with concerns brought on by clients with failing health and exacerbated by the return to “normal” annual pension requirements this year.

Take the following example:

June is aged 88 and is the sole member of an SMSF. Her member balance is $2.4m made up of a number of pensions (including those received as a death benefit from her late spouse). In total her taxable component represents 60% of her balance (ie $1.44m).

Her SMSF asset mix is:

    • Cash $120,000
    • Shares: $80,000
    • Property: $2,200,000.

The assets derive income (net of Fund operating costs) of approximately $85,000 per annum with an annual pension minimum obligation of $216,000.

This situation is a common one for clients as they age. Here we have a SMSF with:

    • largely illiquid assets;
    • an annual liquidity shortfall of around $130,000pa, (not to mention issues that could arise if the property becomes untenanted); and
    • death benefit tax levied on the taxable component would equate to over $215,000 in taxes should the member die.

Members are often faced with choices to:

    • Cease pensions (removing the annual pension minimum requirement (however the rent then becomes subject to income tax in the Fund));
    • Sell the property and invest elsewhere (ie different investment mix in the Fund);
    • Consider transfer of the property out of the Fund as an in-specie transfer:
      • There will be CGT consequences which would largely be mitigated by ECPI factor applied, but should still be considered.
      • Stamp Duty – state dependant, however (for example) in Victoria this is avoidable provided the Duties Act conditions are met.
      • Income outside of super is subject to personal income tax rates.

This does however remove the death benefits tax concern with respect to a death benefit being paid to (say) adult beneficiaries.

Taking the asset from the SMSF into the members personal name also brings the wealth into their Estate (should there be competing directions between the Estate and the members BDBN) and these financial decisions should also be considered with an eye on the estate planning impact.

Seek professional legal opinion first before acting with regards the property implications, as well as ensuring your clients receive proper financial advice to ensure a thorough analysis of the situation occurs.

More information

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.