PORTFOLIO POINT: In specie share transfers will become less appealing and more expensive for SMSFs after June 30, meaning investors who are planning to make transfers should consider acting now.
Every time investment rules change, opportunities present themselves. With superannuation, the rules change constantly, meaning such opportunities can flash by.
In February, I warned that gearing for SMSFs in property could end later this year (see Clock ticking on DIY property, February 8); it would seem unlikely, but it’s possible. So, if geared property is something you’re considering, you might need to get your skates on.
The ability of those over 50 to make concessional contributions of $50,000 a year to super will also be curbed in due course. From July 1, the rules, as they stand, say that the concessional contribution limit will fall to $25,000 for everyone eligible to contribute.
(While the government announced the 50-50-500 policy in May 2010, and has recommitted itself to this policy twice, it has not provided any detail (click here for a column on the topic). Time is running out and it really is becoming a joke, given SMSFs need to plan their contributions prior to and post June 30, 2012.)
The end of in specie contributions?
But June 30 marks another deadline. From July 1, the rules change for in specie transfers of many investments. This is going to especially impact those who intend to transfer listed shares into their SMSF, as all transfers will have to be done through an “underlying market”.
This means that if you have some shares that you want to transfer into super (as either concessional or non-concessional contributions), you’ll have to go through an underlying market where one exists. For listed shares, this will largely be the Australian Securities Exchange.
For other assets where there is no underlying market, such as business real property, a qualified independent valuation will be required from July 1.
The government has changed the rules for in specie transfers because of the potential for “fraud” and the ability to abuse contributions limits. Last year, the government effectively accused some SMSF trustees of being liars over in specie transfers.
(To read exactly why the government was so concerned and moved to shut this practice down, see my column In specie transfers in the frame.)
What can be transferred?
In specie transfers can be used to move assets into superannuation from “related parties”. Generally, SMSFs cannot purchase assets from related parties, but there are a few exceptions.
Those exceptions include business real property, cash and listed securities.
So, can you still do in specie transfers? And how will they be done?
Yes, you can. But in many ways, it will look exactly like you made the transaction on market during the day, with yourself as both buyer and seller.
From July 1, if you’ve got some shares (say 500 BHP shares) that you want to move into your super fund, you’ll need to have the stock transferred through an existing market. That is, there will be an independent body in between to make sure the transfer occurs on a given day at a market price.
That will mean that the ability to “manipulate” price will no longer be possible (which is the government’s point). The transaction will go through at the price of the shares on the day it was made through the broking house.
However, for the next two-and-a-half months, you’ll be able to do these transfers for no cost. It is still a legitimate way to get shares into super and can be worth taking advantage of.
In regards to in specie transfers, be particularly aware that the ATO has extreme concern over this as a tax minimisation strategy, particularly regarding the backdating of transfer forms to reduce CGT and manipulate contribution limits.
Backdating forms is illegal, but almost impossible for the ATO to police, which is why this method of asset transferral into super is being closed off.
There is nothing to be concerned about for those who are correctly implementing this strategy. However, you would be advised to speak to a knowledgeable adviser before proceeding, just to make sure the rules are followed correctly.
How do you do the transfer?
If the prospect of making the most of this opportunity appeals to you, you’ll need to get your skates on.
For a full column on how to do this, including links to the forms for Computershare and Link Market Services that will cover off on most shares you wish to transfer, click here. Some other companies might have their own registers.
The only other option is the option that the ATO/government would actually prefer you to use; that is, to sell the shares and transfer the cash into the SMSF, then repurchase the shares. That’s not an in specie transfer and falls outside of these new rules.
But this introduces two lots of transaction costs, plus timing risk. Share prices could move significantly in the time it takes to get the money into super (T 3 for the trading settlement, plus potentially overnight for the money transfer, so effectively a minimum of four days).
And during volatile periods, where you don’t want to take the risk of being out of the market for a few days, and don’t have enough cash in the SMSF to purchase the shares at the same time (or on the same day you sell them outside super), this still might make sense.
Capital gains tax
Don’t forget that the transfer of shares from outside super to inside your super fund will set off a capital gains tax event.
This will usually be the main cost of the transferral of shares into super (but also the main benefit).
If you bought 500 BHP shares several years ago at $17.50 and you transfer them into your SMSF now at $35, then you will have a $4375 (500 shares x $17.50 x 50% discount for holding them for longer than a year) gain on which to pay tax at your marginal tax rate.
But the real point is also about CGT. If you transfer those shares into your SMSF and hold them until such time as your super fund is in pension phase, then there will be no tax to pay at the time of sale.
That is, if the shares double in price again, from $35 to $70 over a similar sort of period, then your gain of $17,500 will not be liable for CGT.
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 advised to consult your financial adviser, as some of the strategies used in these columns are highly complex and require high-level technical compliance.