In specie transfers: Get in quick

Changes to the rules around in specie transfers will make the practice less appealing after June 30.

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.

Warning

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 alternative...

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.

  • For SMSFs, the recent Super System Review has several main implications, particularly for how the regulator deals with contraventions by trustees. SMSF Academy managing director Aaron Dunn explains that, at present, trustees that have contravened superannuation law may enter into an enforceable undertaking with the ATO to remedy the breach, which the regulator may then accept or reject. However this changes on July 1, and Dunn writes: “New powers will allow the ATO to direct a SMSF trustee to rectify a contravention where it remains unrectified... These powers will range from providing penalties and sanctions on fund trustees, where SMSF Annual Returns may be outstanding or more serious breaches including loans to members, in-house asset issues or breaches of financial assistance.”
  • Meanwhile, the SMSF Professionals' Association of Australia (SPAA) has warned of a “perfect storm” of excess contributions, as the halving of the government’s concessional contributions limit coincides with a sharp increase in the ATO’s Excess Contributions Tax assessments. SPAA CEO Andrea Slattery said: "The cutting of the contribution caps saw a significant increase in the number of members exceeding the caps as seen by the dramatic increase in ECT assessments following the change... Our concern now is there is a very real possibility of another spike in the number of members exceeding their cap when the concessional contribution cap for people aged 50 and over, with more than $500,000 in their account, is halved again from July 1, 2012."
  • With just 5% of retiree investments in annuities, the latest Investment Trends 2011 Retirement Planner Report has found the market has a lot of potential for growth, but also barriers. Investment Trends senior analyst Recep Peker said annuities competed with easier-to-understand term deposits, but interest in annuities was growing despite this. The survey of more than 1000 financial planners found half said they would use annuities in 2012 if they were available. It also found that 22% of Australian adults expressed some interest in annuities, and a quarter of that group were interested in lifetime annuities.

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.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

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