(03) 9020 2905PORTFOLIO POINT: Does it make sense to sell non-super investments, put the money into super and then repurchase? Let’s take a look at the numbers …
If you own investment property and you also own a self-managed super fund, I’ll guarantee that you’ve thought about it.
“Should I sell the investment property, transfer the money into super and buy another investment property? Would it make sense, given how much capital gainst tax I’d have to pay?”
Well, even if you do have to pay a big lump of capital gains tax at the highest two marginal tax rates, the numbers show that it can make sense. Plenty of sense, in the right circumstances. Today, we’ll look at a given set of circumstances and then discuss what could help or hinder the situation from there.
I’ve regularly covered in this column that, unlike commercial property, which can be transferred into super, you can’t transfer residential property into your fund. The only way to do this with residential property is to sell, transfer the money into super and then repurchase.
Facts for our example:
- Current property worth $800,000
- Cost base of $300,000
- No debt on the property and no debt to be used to buy new asset inside SMSF.
- Rent at a constant 4% of property value
- Costs at 1% (or 25% of the rent)
- Property values are increasing at 5%
- Owner has a non-super salary of $80,000 (meaning that additional income is taxed at 38.5%)
- Owner is 50 years old
- At 60, the member turns his accumulation fund into a pension fund
- Property sold at age 65
(And then one that’s hard to say with a straight face: “Super and tax legislation stays constant”.)
The comparison
What we’ll be comparing is the relative value of continuing to hold the property outside of super in your personal name against biting the bullet, selling the asset, making a non-concessional contribution to super and then purchasing a similar quantum of assets inside of super.
In order to make it a fair fight, we have paid the CGT from the property proceeds before transferring the money into super. As a result, super starts with an asset of a lesser value.
As I have nominated a $300,000 cost base, the CGT to be paid is a little over $108,000 leaving nearly $692,000 to be used for the purchase of the investment property inside super. (I won’t ignore the cost of stamp duty inside super, but will assume that is being met by other SMSF funds). This means that the super fund starts with an asset worth less than $700,000, while the comparison asset outside of super super starts out with an $800,000 value.
Then we’re going to assume that our 50-year-old holds the property for 15 years. The property then has to be sold.
I’ve done the extended calculations on an Excel spreadsheet, but have condensed them for the purpose of this example.
| Year 1 | Year 15 | |
| Current property | $800,000 | $1,584,000 |
| Tax at sale | $289,000 | |
| Net proceeds | $1,295,000 | |
| Total rent rec’dAfter tax | $318,500 | |
| Total after-tax return | $1613,000 | |
| SMSF property | $692,000 | $1,370,000 |
| Total rent rec’d after tax | $409,000 | |
| Total after-tax return | $1,778,000 | |
What it shows is that even if you do have to pay the CGT upfront, before contributing the money into super, there is still a significant gain to be made with this strategy. In these circustances the extra benefit is around 10.2% at the time of sale to the SMSF.
What isn’t immediately obvious from these figures is that once the member turned the SMSF into a pension at age 60, the fund will stop paying even 15% income tax on the rent being received by the super fund. If the property was to be held into the future, this would continue to weigh towards being a larger benefit to the SMSF.
Of course, when the SMSF sells its asset when the member is 65 and in pension phase, there will be no capital gains tax to pay.
What if we change some variables?
Firstly, the lower the CGT to be paid before the money is transferred into super, the better the result will turn out for the SMSF. If the cost base is increased from $300,000 to $600,000, the benefit to the SMSF increases from 10.2% to 16.4%. That comes largely because more money is transferred into super at the first instance, because less CGT has been paid.
If the cost base is lower, say $100,000, the SMSF is still ahead at the 15-year mark, but about half as much as with a cost-base of $300,000. The “gain” for the super fund would be approximately 5.7%.
Changing the cost base variable shows that the less time that you’ve held the investment property outside of super, the better the result will be. Or, if you have multiple investment properties, it will probably make sense to sell the one with the lowest CGT to pay, before transferring the proceeds into super, if this is an option you want to consider pursuing.
A note of warning
Putting the proceeds into super now to purchase the new asset will only ever make sense if it is likely that the asset will be sold down the track. If there is little chance or little need to sell it – and therefore it is unlikely that you will have to pay CGT on the asset, or you can pass the tax issue on to the next generation – then a sale and repurchase inside super is unlikely to make much sense.
What if it’s not property, but shares?
It doesn’t have to be property. The same process can be undertaken with shares. And the result is likely to be considerably better.
The other advantages of shares are that they can be in-specie transferred into the super fund. (For an article on in-specie transfers, click here 28/3/08.) There are a few benefits to this, including not having any time out of the market and having far greater control over the amount of CGT you’ll pay outside of super and when the CGT is paid. That is, the transfers can be spread over several financial years, if that would suit your tax position better.
*****
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.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.