An in-specie backdown

The government has scrapped its plan to scrap in-specie super transfers.

Summary: The federal government had previously made it clear it would outlaw in-specie transfers of assets, such as shares, into self-managed super funds from July. But, last week, the government quietly dumped its amendment to ban the practice.

Key take-out: The government has also backed down on its plan to require an independent qualified valuation on the transfer of business real property into, or out of, a SMSF.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

If there’s a saint of self-managed superannuation trustees, then she’s just delivered on one of your prayers. And it’s a biggie.

In-specie transfers of assets into your super fund are, it would appear, back on the table. Despite serious misgivings about the practice – the federal government essentially labelled SMSF trustees “liars” and “frauds” a few years ago – they have decided to remove the amendment from the bill that would have outlawed the practice.

In-specie transfers into super were due to be effectively wiped out from July 1, 2013, among some other changes designed to stop some practices the government believed were rorts.

But in Parliament last Wednesday, Assistant Treasurer David Bradbury said the government no longer considered the practice to be the same significant issue that it was when the ban was first mooted.

And so, the controversial Schedule 4 was dropped from the Tax and Superannuation Laws (2013 Measures No. 1) Bill as it went for a third reading on Wednesday.

Mr Bradbury quietly dumped the rule changes with the following statement: “Since the time of the review, the government has made significant reforms to the superannuation system, including to the SMSF sector. Further consultation with industry has indicated that the concerns the measure is seeking to address are not as pressing as they were at the time of the review.”

The review was Jeremy Cooper’s Super System Review, which had proposed bans on in-specie transfers into super because they were open to potential massive abuse by SMSF trustees. (I’ll come back to that.)

An in-specie transfer into super is the act of moving, for example, a parcel of shares you own in your personal name into super. You might wish to transfer into your SMSF 500 shares in BHP (currently worth approximately $17,500) that you own. Depending on your personal situation, this contribution could potentially go in as either a concessional or non-concessional contribution.

For a full column on the initial decision, see this column (In specie transfers in the frame). In essence, the government claimed that some SMSF trustees were using the rules to minimise capital gains tax outside of super and to manipulate contributions caps inside super.

How would that work?

Let’s take a small cap share that was worth $1 on January 1 , 2013. Three years earlier, when purchased, it was also worth $1. In their personal name, the SMSF trustee owned 25,000 shares, valued at $25,000.

Suddenly, the shares rocket from $1 to $10 by April 1, 2013 on the back of some discovery. They’re now worth $250,000.

The government was alleging that some SMSF trustees were backdating paperwork to say that the shares were transferred into super on January 1 at a price of $1.

If they were making this as a concessional contribution – which are potentially allowed for those able to make those contributions – then several things have happened.

First, they would be declaring that the shares were sold for $1, which would mean no CGT (at up to 23.75%) because they were sold at the same price they were purchased for.

Second, they are now in super, where they will be taxed at a maximum rate of 15% (but potentially 10% or 0%, if in a pension fund).

Thirdly, they were able to make a concessional contribution to super of $25,000 for shares that are now worth $250,000, thereby rorting the concessional contributions limit.

Business real property transfers

There is another change that bites the dust at the same time.

When it came to the transfer of business real property into, or out of, a SMSF, by a related party, the government had proposed that an independent qualified valuation would be required.

This would have added a layer of cost to the SMSF. But, again, potentially it would have saved the government a monty in manipulated CGT and contributions limits.

The change of heart keeps open a SMSF favourite practice that, you would think, is far less likely to be abused in the future, simply for the exposure the practice has had.

The reason most trustees have used in-specie transfers was not nefarious. They have owned some shares in their personal names. They’re sort of attached to them, but they understand they would be better off inside super, so they want to transfer them in.

By being able to use off-market transfers, they are able to transfer the shares without having to actually sell, then rebuy them inside the super fund.

While this is no longer likely to be banned, it would appear, the fact is that the majority of SMSF trustees using the rules were doing so properly. Their main reason for doing it this way was to avoid two sets of trading commissions (to buy and to sell) and being out of the market for up to a week, in selling the shares, settling, transferring the money into super and then repurchasing.

A few frauds were ruining it for everyone. But one thing has changed during that time. It used to be that the two major share registries (Computershare and Link Market Services) would do that transfer for free. No longer.

For a few years now, they have been charging about $50-$55 to do the paperwork for the transfer. That new fee, on its own, is understood to have reduced the number of those willing to actually undertake the transactions.

But, in any case, the ban that was to come into force on July 1, 2013, is no longer.

And you’ll be able to continue to shift your shares in. At least for the foreseeable future.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E:
Graph for An in-specie backdown

  • Retail investors, including trustees of self-managed super funds (SMSFs), can now legally buy and sell Australian Government Bonds (AGBs) on the Australian Securities Exchange (ASX). According to Michael Hallinan of SUPERCentral, the governing rules were recently amended to allow trustees to invest in GCS Depository Interests, also known as AGBs. “ AGBs are interest-bearing securities issued on behalf of the Commonwealth Government which have been structured so that they can be purchased in ‘retail’ level amounts,” said Hallinan.
  • As noted above, the federal government has decided not to proceed with proposed amendments to the Taxation and Superannuation Laws (2013 Measures No. 1) Bill 2013 that would have banned self-managed super funds (SMSF) from carrying out off-market transfers of listed securities. The SMSF Professionals’ Association of Australia (SPAA) welcomed the decision. “We have always advocated a level playing field for all superannuation funds and the retraction of the proposed amendments will help achieve this goal,” said SPAA chief executive Andrea Slattery.
  • The number of new SMSFs being registered slowed in the March quarter, according to data released by the Australian Tax Office (ATO). The number of SMSFs created in the three months to March was 5,840. This compares with 9,748 in the December quarter of 2012, and more than 10,000 in the previous two quarters. The total number of SMSFs also passed the 500,000 mark in the quarter, according to the ATO.

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