A super time to transfer shares

Some trusty old stocks that have forever been investor favourites (both inside and outside of super) have come under incredible pressure in recent months.

The obvious sector has been financials: investors have lined up with consumers lately to engage in a bit of bank bashing. But plenty of other big dividend payers have also been sold off from portfolios.

Falling stocks obviously present opportunities. The standout one is the ability to pick up cheap stocks, for those who were cashed up and/or patient. In the near future there may be many investors crowing about picking up ANZ for less than $20, Westpac for not much more than $20, NAB under $28 and CBA spent enough time under $40 for plenty to get on board. Picking the bottom is an opportunity for anyone who’s game.

But there is another more specific opportunity for SMSF trustees or DIY fund operators. And it’s a double-sided opportunity to boot, for those who have both an SMSF and holdings of direct stocks outside of super. This comes in the form of in specie contributions into your super fund.

In specie contributions can be done at any time. You can “shovel shares into super” whenever you wish, within the limits for non-concessional contributions. (To read more on the mechanics of in specie contributions, see Trish Power’s column, Dear Trish).

The disincentive to transferring shares into super, however, has often been that it is a capital gains tax event. When you transfer the shares, you are actually “disposing” of them. The price at which you transfer them to your super fund is the effective sales price for CGT purposes. If you bought them years ago for $2 and they’re now worth $10, then you’ve got a $8 capital gain on which you will probably need to pay some tax.

However, the fall in the market has provided what might be a short-term opportunity to cut your capital gains tax, while getting shares into the tax-advantaged arena of super. It will allow you to take advantage of non-concessional contribution limits and potentially get some huge dividend paying stocks into super, where they will be taxed at a maximum rate of 15¢ in the dollar (as compared to a maximum of 46.5¢ in the dollar outside of super).

For example, let’s take ANZ shares and assume that you bought 2000 of them many years ago for $10 for a total cost of $20,000.

Over the past year, ANZ’s shares have been as high as $31.74 and as low as $19.38. For the sake of simplicity of numbers, let’s call it a high of $31 and a low of $20.

Your 2000 shares were worth as much as $62,000 at one stage. If you had sold at that time, you would have had a gain of $42,000. If this was in your personal name, this would leave you with a potential CGT payment of a maximum of $9765 ($42,000 x 50% x 46.5%).

Selling when the shares were trading at $20 would result in a CGT bill of a maximum of $4650 ($10,000 x 50% x 46.5%).

What are the advantages?

• The CGT you have to pay on the transfer now is less than you would have had to have paid if you had sold it one year ago.
• If you believe stocks have bottomed, the CGT you pay now is probably going to be less than any CGT you might have to pay in the future.
• If you get the shares into super and you don’t intend to sell them until after your super fund is in pension phase, you will be capping your maximum CGT now and you may never have to pay CGT on any price gains made from here.
• The dividends that you receive in your super fund before you go into pension will be taxed at 15%, rather than as much as 46.5%.
• The dividends you receive after you go into pension phase will see your dividends taxed at zero.
• There is no brokerage on the transfer.

The after tax value of bank shares’ dividends currently
	Dividend yield (grossed up, historical)	46.5% (marginal tax rate)	41.5% (marginal tax rate)	31.5% (marginal tax rate)	15% (non pension super)	0% (pension super)
ANZ Banking Group	7.99	4.27	4.67	5.47	6.62	7.99
Commonwealth Bank	8.81	4.71	5.15	6.03	7.49	8.81
National Australia Bank	8.5	4.55	4.97	5.82	7.23	8.5
St George Bank	8.62	4.61	5.04	5.9	7.33	8.62
Westpac Bank	7.54	4.03	4.41	5.16	6.41	7.54
Yield calculated as at close of trade on Tuesday, March 26.

It’s not just bank stocks that have fallen hard. And while bank stocks have juicy dividends, which make the income side of the strategy even more appealing, the strategy works just as well for any stocks with substantial capital gains.

In technical terms, SMSFs cannot acquire assets from related parties to the fund. However, three exceptions are made. These are business real property, in-house assets (so long as the asset makes up less than 5% of the value of the super fund) and listed securities. So don’t assume you can just transfer shares in any business you happen to own.

The price at which the shares are transferred must be the price on the date of transfer (generally the closing price for the day). So you must choose the date on which you transfer very carefully.

There are several other technicalities you must check before going ahead with any transfer. You must check:

• That your super fund’s trust deed will allow for the transfer of assets into the fund.
• Whether you need to satisfy the work test.
• That the asset is transferred at market value.
• The member’s contribution statement reflects the allocation to the member for whom the contribution was made.
• That transactions are made on an arm’s-length basis.
• That the contribution doesn’t create a liquidity problem for the fund, in that it doesn’t have a problem meeting pension payments).

Another point you need to keep in mind is the limit on contributions. For regular employees, in specie contributions are considered to be non-concessional, so there is a limit of $150,000 a year, or $450,000 over three years (if aged under 65). If you are eligible to make concessional contributions to your fund (self-employed, self-funded retiree or earning less than 10% of your salary from employment) then the $50,000/$100,000 concessional limits could also be used. These are per person limits, so two or more members of a fund can take advantage of these limits.

Bruce Brammall is a senior financial adviser with Stantins Financial Services.