Tax with Max: Transferring assets from companies to SMSFs

Moving shares to SMSFs from companies, working out Telstra’s buyback offer, starting an account-based pension and more.

Summary: Investors face two potential problems when winding up a private company and transferring shares to their SMSF: the capital gains tax payable by the company, and the loss of franking credits, which may have built up in the company to manage tax payable by the individual. The transfer involves a number of complicated areas of income tax and personal professional advice is required before taking any action.

Key take-out: If the company was set up after September 1985 – when capital gains tax was introduced – transferring shares to an SMSF will incur a 30% tax on any increase in the value of the publicly listed shares. If it was set up beforehand, there may be some benefit depending on when the shares were purchased.

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

Transferring shares from companies to SMSFs

I have inherited my father's private company which owns stock market shares as its sole assets and income source. I want to voluntarily deregister this company in the near future and move the assets into my SMSF. The company has about $10,000 in its franking credit account and the accountant has suggested some of this will be lost if I proceed. I don't understand why the accountant would have allowed the franking credit account to build up as my father was getting very old. Is there a solution to this that doesn't lose any of the franking credits?

Answer: Your father's accountant may have let the franking account balance build in your father's private company to manage the tax payable by your father. Depending on what other income your father was earning the accountant would have restricted the dividends paid to him each year. This would have been to make sure that your father either received a tax refund or paid no tax as a result of the franking credits included in the dividend from the private company.

If you proceed with your plan of transferring the shares to your SMSF and winding up the private company you could in fact have two problems. The first is the loss of the franking credits, and the second could be capital gains tax payable by the company on any increase in the value of the shares purchased.

The amount of capital gains tax payable by you upon liquidation of the company will depend on when your father set up the company. If it was set up before September 1985, when capital gains tax was introduced, there may be some benefit from winding up the company depending on when the private company purchased the publicly listed shares.

If the company was set up after September 1985, by transferring the shares to your SMSF the private company could pay 30% tax on any increase in the value of the publicly listed shares.

Depending on your age and other income sources you may get a benefit from receiving dividends from the private company over a number of years so that the franking credit will result in a tax refund or only a small amount of tax payable. Because what you are planning involves a number of complicated areas of income tax you should seek professional advice before taking any action.

Working out Telstra’s buyback

In the Scott Francis’s recent article on the Telstra buy back (see Telstra’s special offer) he mentioned that the $2.40 would a dividend with a franking credit of $1.03. I thought if the franking credit is 30% the franking credit should be 80 cents … what am I missing?

Answer: In Scott’s article he started with the assumption that the average Telstra price over the pricing period would be $5.50. If a shareholder tendered their shares at the largest discount they would receive:

  • $2.33 as a capital payment;
  • $2.40 as the cash payment for the fully-franked dividend component of the dividend; and
  • $1.03 as the value of franking credits.

The first thing to understand is that a fully-franked dividend carries with it a franking credit equal to the tax originally paid by the company on the profit it made. This means to calculate a franking credit you must first divide the dividend by 0.7 to arrive at the original profit.

In Scott’s example of a $2.40 fully-franked dividend this equals an original profit made by Telstra of $3.43. The company tax paid on a profit of $3.43 at 30%m which equals a franking credit of $1.03. A franking credit is never calculated by multiplying the dividend received by the 30%. The fully franked dividend must always be divided by 70%and then multiplied by 30%to arrive at the franking credit.

Starting an account-based pension

I am 72 and not working but our accountant deems me to be working enough hours per year to meet the work test so that I can make super contributions. The work I do is for my wife and for our SMSF. My wife earns over $200,000 a year and will probably not retire for another 3 years.

Our SMSF is worth over $500,000 and my wife will receive a super payout of well over $500,000 when she retires. With the proposed changes commencing on January 1, 2015, relating to the income test for the age pension, is it worthwhile me starting an account-based pension and applying to Centrelink for the age pension?

Answer: The first thing I do not understand is how your accountant is using the work you do for your SMSF to qualify for the work test. To pass this test the work must be paid employment and not voluntary work, and as a trustee cannot be paid for the performing their trustee duties for an SMSF, I cannot see how this can be used to help you pass the work test.

It would not make sense starting an account-based pension in the hope that you would qualify for an age pension and therefore be covered under the existing income test. This is because a couple have their combined income included under the income test. Once a couple earns more than $73,455 a year they do not qualify for the age pension. Unless your wife gave up her $200,000 a year salary you would not qualify for the age pension.

Accounting for reasonable benefit limits

I have about $2 million in super and my wife has about $150,000. I am 51 years old and not drawing a salary any more, living off distributions from the family business both as dividends and management fees. My wife also works as a contractor and hence the only super contributions concessional or otherwise to either of us are what we choose to make from distributions from those businesses.

I doubt I will ever retire but plan to stay engaged with the business as the next generation takes over the day-to-day running. I plan to get heavily involved with charities and not-for-profit organisations in the community. But the day will come when the SMSF has to change to pension mode.

I think it is likely that the government will impose reasonable limit type caps on either funds in super or income from super in the future. We will be in the position of making the full $540,000 bring forward contribution this year for one person. Should I make that in my name banking on the government grandfathering existing super funds when changes are made? That would leave room in my wife’s fund to add more up to any new limit in the future.

Answer: It is very hard to work out what any government will be doing in the future with regard to superannuation. If changes are made it can be only hoped that the long-standing tradition of grandfathering existing benefits will be maintained.

I have heard many ideas put forward about changes being made to superannuation but I have not heard of a reestablishment of reasonable benefit limits. Reasonable benefit limits do not make sense because the amount of superannuation a person can have is controlled by the contribution limits.

If reasonable benefit limits were reintroduced, what you are planning to do – making all of the $540,000 your non-concessional contribution – does make sense. Super funds are no longer forced to go into pension mode as they were under the old superannuation system. This means you could keep your SMSF in accumulation phase for as long as you want under the current rules and regulations.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au