Summary: An investor with a share portfolio outside super may wish to transfer the holding into an SMSF using an ‘in specie’ contribution but would have to pay capital gains tax. If the value of the portfolio has fallen, the amount of tax payable will be lower. Investors using ‘wrap’ style funds can perform a similar transfer by selling the holding outside of super, contributing the proceeds to super and then repurchasing the same shares.
Key take-out: The current lower levels of the market effectively reduce the amount of capital gains tax to be paid on holdings and might just sway investors in favour of a transfer of assets into super.
Key beneficiaries: General investors. Category: Superannuation, tax strategies.
One of the benefits of a self-managed super fund is the ability that it has to accept ‘in specie’ contributions of some assets. Liquid assets, like shares and managed funds, can be transferred by an owner directly into a self-managed superannuation fund as a contribution.
The current market downturn provides an interesting twist to this opportunity. When an asset is transferred into a self-managed super fund, there is still an obligation to pay capital gains tax. The recent fall in the share market will reduce this tax obligation, and investors who had been unsure about whether the strategy of making such a contribution to superannuation made sense because of capital gains tax, might find this an interesting time to rethink.
A case study: The changing capital gains tax
Consider an investor close to retirement with a $100,000 holding with a cost base of $50,000 that they have held for more than 12 months. If they wanted to transfer this holding into superannuation, they would have to pay tax on a $50,000 gain that would receive a 50 per cent discount – effectively they would have to pay tax on $25,000. This will be around $12,500 for an investor on the highest tax rate. As they try to compare the up-front tax cost of $12,500 with the benefit of having the funds in the lower tax environment of superannuation, they may have decided that they would prefer not to pay the $12,500 in tax and keep their investment outside of superannuation.
Let’s assume that the same holding has now fallen in value by $15,000 – entirely reasonable given the current market downturn. It now has a value of $85,000 with a capital gain of $35,000, or $17,500 after the 50 per cent long-term capital gains discount. Tax payable will now be around $8,750. This lower tax impost might be enough to swing the balance in favour of contributing the assets to superannuation.
A ‘virtual’ in specie contribution
Investors who use ‘wrap’ style funds, or even industry super funds that now allow the choice of direct shares as investment options, can perform their own ‘virtual’ in specie transfer even when a true in specie transfer is not available. By selling the holding outside of superannuation, making a contribution of the proceeds and then repurchasing the same shares they effectively accomplish the same things. And, if the holding has fallen in value because of the current market downturn, they will end up paying less capital gains tax.
There are two potential downsides to this process. The first is that there is some brokerage to be paid – although this is usually not a huge sum of money. The second is that it will take a few days for the proceeds of the share sale to become available, be transferred into superannuation and then be available for investment. If the shares were to rise in value over this time, then this would reduce the size of their holding.
Show me the money: The benefit of transferring assets into superannuation
While it is well known that the core benefit of transferring assets into superannuation is the lower tax rate, 15 per cent while a fund is in accumulation mode and 0 per cent once it starts to pay a pension, sometimes it is hard to put a figure on the benefits of this. The Vanguard index funds provide an interesting insight into this benefit, as they report after tax investment returns.
Over the past seven years, an investment in Vanguard’s Australian Shares index funds held in the superannuation environment has provided an after tax return of 6.91 per cent pa (to the end of July, 2015). An individual on the top tax rate, with exactly the same investment, has received an after tax return of 5.07 per cent pa for the same period. The only difference between these two figures is the impact of tax. Using these figures over the past seven years, a $50,000 investment in Australian Shares held in the superannuation environment would have grown to $79,800. The same investment taxed at the highest tax rate would only grow to $70,700.
There are other benefits to holding assets in superannuation worth keeping in mind.
Once a superannuation fund starts to pay a pension, there is a minimum pension required to be taken each year. This starts at 4 per cent per year (up to 65), increasing to 6 per cent by 75 and 7 per cent by age 80. While you are forced to withdraw these funds from superannuation, you are not forced to spend them – the strategy some people choose is to build an investment portfolio outside of superannuation. Transferring as many assets into superannuation as possible, provided that you are not paying an unreasonable amount of capital gains tax, allows you to build a sizeable portfolio outside of superannuation when you are forced to withdraw more money as the minimum pension withdrawal decreases, and still not pay any tax.
It is often a difficult decision as to whether or not you transfer assets into superannuation – trying to weight up the expense of capital gains tax against the tax benefit of the superannuation environment. The current market downturn, which will effectively reduce the amount of capital gains tax to be paid on holdings, might just sway the balance in favour of a transfer of assets into superannuation.
Scott Francis is a personal finance commentator, and previously worked as an independent financial adviser. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.