Transfer countdown

SMSF trustees need to act before June 30 if they intend to do an in-specie transfer.

PORTFOLIO POINT: The market’s recent slump is perfectly timed for those looking to make curtain call in-specie transfers to their SMSFs.

If you’re a trustee and enjoying life at the moment, you must have been sitting in cash. It’s been a nightmare five or six weeks for share investors.

Few SMSFs that are loaded up with Australian shares are going to finish the year in the black. But that’s the glass half-empty outlook on events.

There is a glass half-full way of looking at things; actually, there’s several. The first would be: “Wow, a once-off opportunity to buy some quality stocks for my fund”.

Another positive spin would be: “Here’s my chance to transfer some beaten up shares into my SMSF at a time when my capital gains tax is going to be reduced”.

And it’s that opportunity on which one curtain is about to drop (well, sort of). From July 1, transferring shares into your SMSF is going to be more expensive and, potentially, less advantageous. The government has announced that it doesn’t trust SMSF trustees to behave legally when it comes to the in-specie transfer of shares into super, so it’s changed the rules. For my recent columns on this change to the law, see In specie transfers in the frame and In specie transfers: Get in quick.

Share prices are down ... and so is CGT

What’s different now? The ASX/200 is sitting at 4,100 points, when just five weeks ago it was sitting at 4,500 points. A lot of your favourite stocks have been belted 20% or more.

BHP Billiton is down from $38 to below $31, Rio Tinto is off from $72 to $53, Toll slumped from $6 to $4.35 and AMP has slipped from $5 to $3.70.

But here’s where Newton’s third law (“for every action, there is an equal but opposite reaction”) can be used to an SMSF trustee’s advantage by way of an in-specie transfer.

The share price plunges of your favourite stocks could provide the perfect opportunity to get those shares into your SMSF – and, comparatively, save a bundle in tax at the same time.

How does it work?

You need to transfer the asset via an “off-market” transfer form, which is available from either Computershare or Link Market Services, depending on which company you’re trying to transfer and who they use for their shareholder services.

And the benefits of doing it now?

Let’s say you bought $20,000 worth of BHP shares a decade ago. Back in February, they were worth $80,000. As of the close of trading on Monday, they were worth around $65,000.

Transferring those shares into super sets off a few things. First, transferring the shares from your personal holding to your super fund creates a capital gains tax event (in this example, a gain of $45,000 that is taxable). Given it’s been owned for more than a year, the capital gain is reduced by 50% to $22,500.

Had the shares been transferred in February, the gain would have been $60,000 (reduced to $30,000 with the 50% CGT discount).

For those on the highest marginal tax rate, the tax saving on the $7,500 difference in capital gain of $3,562.50 (using a 47.5% marginal tax rate, and taking into account the Medicare levy and this financial year’s flood levy).

That’s the opportunity that is presenting itself in June 2012.

But hang on ... what about the major benefit?

Right – that would be potentially never having to pay capital gains tax on the asset/s ever again. That is, sell your BHP shares into super and pay tax on the gain between $20,000 and $65,000 now and, so long as you sell them after you’ve turned on a pension in your SMSF, you won’t have to pay CGT, as funds in pension mode don’t pay tax on income or gains.

Yes, that’s correct. If your $65,000 worth of shares now turns into $300,000 worth of shares (or even $1 million) between now and when you sell them after the pension is turned on, then you’ll get to keep the whole lot, with no CGT to be paid.

What happens from July 1?

You will still be able to make in-specie transfers, but it’s likely that you’ll have to pay brokerage (or a processing fee) for it and it will be harder to “time” the sale precisely, as the date of transfer will, presumably, be the date that it is processed (or received by the processing outfit).

The government would actually prefer you to sell the shares outside of super, transfer the cash into super, then repurchase them.

The government has left the door open for in-specie transfers and they will still make sense, particularly for those who fear being out of the market for a period of time. A great potential loss caused by that would be to sell on Monday at $2 a share, receive the money on T 3 on Friday, transfer it overnight to the SMSF bank account, then buy the shares the following Monday, when the market has, potentially, moved to $2.20.

The new rules for in-specie transfers will allow you to transfer shares without that particular timing issue coming into play.

But it’s still a contribution to super?

Yes. These transfers are a contribution to super, so they must either go in as a concessional contribution (CC) or non-concessional contribution (NCC).

While anyone under the age of 65 can make non-concessional contributions of up to $150,000 a year (and potentially use the three-year pull-forward rule to put in $450,000 at once), you need to be more careful about concessional contributions, particularly as they relate to the rules regarding being an employee versus being self-employed (the 10% rule).

Is there anything to be wary of?

The whole reason this is being turned off on June 30 is because the government doesn’t trust SMSF trustees to do this without being fraudulent. Some of the loopholes have been open to massive abuse.

With transfers on the ASX’s top 50 or 100 being the way they are in June 2012, that’s not going to be as great a concern to the ATO.

And if you’re doing things legitimately, there’s nothing to fear from the ATO. But if you’re intending to make the most of recent share price falls, you need to act quickly.

  • A new direct investment service has been launched, aimed at giving Australian super fund members more control of their investments without the full cost of SMSFs. UBS and FNZ Australia have announced an alliance to give super funds a platform where members can access individual investments online. Under the new service, the companies say that super funds will be able to offer their members the ability to invest in global equities, term deposits, model portfolios, managed funds and cash products, while retaining the benefits of staying inside a major fund. Head of UBS Platform Solutions Group, Scott Webster, said the company was excited to invest in the platform. “The solution provides an alternative to establishing a Self-Managed Super Fund, at a fraction of the cost,” Mr Webster said.
  • The release of draft regulations relating to more of the 2010 Super System Review recommendations has flagged a number of changes in the Stronger Super reforms that could be just around the corner for SMSFs from July 1. Under the proposed changes, trustees would be required to consider insurance for the fund and regularly review the investment strategy. Potential changes would also specify how funds are to value assets at their net market value. From the 2012-13 year SMSFs must value assets at net market value, though currently they are allowed to choose valuation by either historical cost or market value. SMSF Academy head Aaron Dunn said: “It will be interesting to watch over the coming years as to the influence of the inclusion within the fund’s investment strategy to consider insurance. I would argue that many SMSF trustees (not all) lack a solid written investment strategy.” Dunn said the strategy of many is more about compliance than setting risk or diversification objectives – and from July 1 this will mean insurance too.
  • Loan providers for SMSFs are preparing for increased activity after an Australian Taxation Office ruling provided more clarity on the key concepts around maintaining and improving assets – SMSFR 12/1. According to a report from Banking Day, ING Direct is developing its SMSF loan product, which has been taken up by three of the bank’s 15 mortgage managers – AFG, Homeloans and Australian Financial. Five more managers are reportedly preparing to offer the loan, which is specifically designed to be used to purchase residential property. A commercial property loan is expected to be launched in coming months.
  • The ongoing fallout from the collapse of Trio Capital has raised the possibility of a change in licensing conditions to require SMSF risk to be more widely discussed. Australian Securities and Investments Commission official John Price reportedly told a Senate Estimates hearing last week that neither financial planners nor accountants had an obligation to warn of the greater risks in SMSFs. “We did not find either documentary or written evidence that those risks of theft and fraud were provided by financial advisers to clients, nor is it general industry practice to do so, nor is there a specific legislative provision that requires it to be done,” Mr Price said. He said such a requirement could be put in place by varying licence conditions.

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