|Summary: In-specie transfers of personally held shares into your super fund can make sense, and the rise in the sharemarket could be an opportunity to move shares to gain a tax advantage down the track. But there are strict rules, and the introduction of share transfer fees have dampened demand.|
|Key take-out: Be aware that the act of transferring personally held shares into your SMSF sets off a capital gains tax event for the disposal, based on the price set at the time of transfer.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
There was a time, fairly recently, when self-managed superannuation fund trustees were considered liars and frauds in the eyes of the government (and the Treasury).
At least, that was the case in regards to the in-specie transfer of assets into SMSFs.
The ability to “rort” the system was considerable (as I pointed out in this column In-specie transfers in the frame). So the former government announced in 2011 that it would move to close down the ability for SMSFs to make in-specie transfers.
But it tripped and stumbled. It was far more complex to implement than originally believed. And it eventually ditched the idea, in July last year, claiming that it was no longer the issue that it had once been.
It was helped by the fact that the share registry companies Computershare and Link Market Services, which process share transfers, slapped on $50-60 processing fees around that time, which considerably dampened demand for a service that had been previously free.
So the ability to make in-specie transfers still exists, even if interest has waned. And it’s a legitimate way to put shares and potentially property into your SMSF, and to help you reduce some tax.
Transferring shares into your SMSF
In recent weeks, there has been a sell-off on the Australian market – not for the first time since this bull run started in May 2012.
The overall run will have generated great gains for many investors – both inside and outside of their SMSF. Gains are good, but they also require tax to be paid upon the sale.
There will be plenty of trustees who wished they’d bought all of those shares inside their SMSF in the first place. That could leave them with the possibility of paying no capital gains tax (if sold in pension phase) or tax of 10-15% (in accumulation).
Of course, there is no CGT to pay if you don’t sell. Sometimes taking gains is necessary. Sometimes taking the pain of CGT now can be worth it if it sets up tax-free gains in the future.
Why would you? If the shares are ones that you wish you’d purchased inside your SMSF, the recent sell-off could be the opportunity to take stock, take the gains (reduced a little by the recent falls), but then get those shares into super where they might never be taxed again.
For example, say you bought 1,000 Westpac shares for around $22 ($22,000) back in mid-2012. They peaked near $35 in October, and have since fallen back to around $30.
The gain on those shares now would be $8,000 – compared with $13,000 at the height of the market – with tax at your marginal rate paid on half of that gain (if held longer than a year).
Setting off CGT now
The act of transferring the shares into your SMSF sets off a CGT event for the disposal, based on the price set at the time of transfer.
Your fund then picks up those shares at that price. Whether it pays gains on those shares in the future will depend on whether they are sold while the SMSF is in accumulation phase (10-15% tax) or in pension phase (0%) tax. (On top of that, the dividends will be taxed at either 15% if in accumulation phase, or $0 if they then become an asset backing a pension.)
A crucial point as to whether this concept makes sense or not is the determination of whether the CGT to be paid will be made up for by the lower tax arrangements in your SMSF.
Concessional or non-concessional?
The shares can potentially be contributed into your SMSF under either the concessional contribution (CC) or non-concessional contribution (NCC) limits.
NCCs are reasonably straightforward. See this column (Why non-concessional contributions pay) for who can contribute NCCs and their benefits. All Australians under 65 can make them, while those up to 74 can make them if they meet the work test.
But making in-specie contributions of shares as a concessional contribution, where you claim a tax deduction for the contribution, is a little trickier. You need to be able to make the contribution as a personal deductible contribution.
You must be eligible to contribute to superannuation, the contribution must be made to a complying fund, and the deduction must be claimed in the year the contribution is made.
But if you earn more than 10% of your income as an employee, then you are unable to make a personal deductible contribution. So this will exclude most employees, plus many others who earn part of their income as an employee.
The self-employed and self-funded retirees are going to be most likely to be able to make the in-specie contribution as a deduction.
If you’re turning 75, then the contribution needs to be made on or before the 28th day after the end of the month in which you turn 75. So, if you turn 75 today (February 10), then you need to make the contribution before March 28.
A valid deduction notice, in an ATO-approved form, must also be made to the fund trustee.
It also needs to be made under the concessional contribution limits, which is $25,000 for the under 60s and $35,000 for the over 60s. (From July 1, 2014, it is expected that the $35,000 concessional contributions cap will be extended to those over 50. There has been no word from the Coalition government on a change to this rule, so it can be assumed, for the moment, that this change will continue.)
And, obviously, if it is made as a concessional contribution, the fund will then also have to pay contributions tax (15%) on the contribution – which you would also need to take into account in determining if this makes sense in your situation.
Some of the gloss has come off
Yes, some of the gloss has come off in-specie contributions as a strategy. The damage was more done by the share registrars (Computershare and Link Market Services) charging for the service ($55), which was previously free.
Often it would be simpler to avoid the paperwork and simply sell the shares, get the cash and put it into super, then repurchase the assets.
But for some, that could leave you out of the market for a period of up to a week. Sell the shares, receive the cash in T 3 (trade plus three days), transfer the money into super, then purchase the assets.
In-specie contributions can ensure that you’re not out of the market.
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.
- The SMSF Professionals’ Association of Australia (SPAA) has supported the federal government in opposing a proposed compensation scheme for SMSFs. The chief executive of the Financial Services Council, John Brogden, last year called for the introduction of a levy to be paid by all SMSFs to compensate SMSF victims of fraud. But SPAA chief executive, Andrea Slattery, agreed with Assistant Treasurer, Senator Arthur Sinodinos, who said the sector needed to be self-reliant and responsible for its own decision making and that a compensation scheme would promote excessive risk taking.
- The Australian Taxation Office is urging SMSF trustees to properly consider the responsibility and risk involved in managing SMSFs. In a statement issued last week, the ATO outlined what areas SMSFs need to be aware about, including various laws and risks. “If you decide to set up an SMSF, you’re legally responsible for all the decisions made, even if you get responsible advice,” the ATO said.