(03) 9020 2905PORTFOLIO POINT: In-specie share transfers into your SMSF can be win-win for reducing tax outside super and increasing a tax-free (or tax-effective) income stream.
We should all know that the tax benefits of a super fund in pension phase are considerable. A fund in pension phase pays no tax on earnings and, at worst, you will also get a rebate on the income stream taken from it.
As a result, if you’ve got a choice about where your assets are held, it’s almost inevitably going to be better holding the asset inside super. A million bucks in super is likely to be worth – when after-tax positions considered – considerably more than a million bucks outside super when all taxes are taken into account over the coming decade.
So how do we get more of our assets into super?
Sure, you can put cash into a super fund. The concessional contribution limits for super are such that, if you’re eligible, you can put in up to $150,000 a year into the fund, with the ability to put in $450,000 in one year by bringing forward three years worth of contributions at once. Sell down your shares and put the cash in.
Another way is potentially through in-specie transfers of existing assets, particularly Australian shares (and managed funds). The main benefits of doing this, as opposed to selling them and puttin the cash into super to repurchase, is that you won’t be out of the market for any period and you’ll save yourself brokerage.
If you’ve got a sizeable share portfolio that you’re attached to, then in-specie transfers might make some sense. Listed shares, like commercial property and cash, are assets that can be transferred in-specie into a super fund. (Residential property is the largest of the annoying assets that can’t be transferred in.)
Why would you do it? Largely because once you get those assets into super, you will minimise the tax you will pay on the dividends and capital gains in the future. Complying super funds pay no more than 15% tax on income and can potentially pay 10% on capital gains. And that’s in accumulation phase. Once a fund is in pension phase, there’s no more tax on income or gains.
The main downside? You will set off some capital gains tax events now (if there are gains in your portfolio). But this might not be a disaster and can be managed.
With the ASX 200 sitting around 4700 and still well below the November 2007 peak off around 6800 points, you might find that large parts of a portfolio might not require too much tax to be paid to get it into super.
Who could this most benefit?
In-specie transfers are a potentially brilliant strategy for people who are not far off moving to a transition to retirement (TTR) and salary sacrifice strategy. That is, pretty much anyone from about 50 onwards.
It will usually also be suitable for those in their late 50s who haven’t started a TTR strategy (why not?). And particularly for those who are older than that, but are still able to contribute, if you want to pay the CGT tax now and minimise, virtually to zero, the amount of tax you’ll pay on those shares, as income or capital gains, in the future.
What’s the first step?
You, or your adviser or accountant, need to determine the CGT position of your non-super portfolio. You need to know how big the capital gains in the portfolio are.
If you realise that, overall, you have some considerable gains in a portfolio of 15 shares, you might be able to manage the process of transferring the shares into super. If you are close to retirement, but will still be eligible to make non-concessional contributions after you retire, then you might wish to wait until your employment income has reduced to zero.
What do I need to be mindful of?
Most notably, you need to be aware of non-concessional contributions limits. They are $150,000 a year for those employed and under age 65.
If eligible, you can put in up to $450,000 as a pull-forward. But they are per person limits. If you have two portfolios in the name of husband and wife, you could potentially put in $450,000 each.
You also need to be aware of the type of gains being made in your portfolio. Have you owned the shares for longer, or shorter, than one year? If less than a year, do you want to transfer other shares into the SMSF instead?
What tax will I have to pay?
At the point of transfer from personal names into the super fund, a CGT event occurs.
If there are gains in the portfolio, or in the parts of the portfolio that you are transferring, then you may need to pay capital gains tax. The gains are being made in your personal name.
If they are offset with capital losses (dogs in your portfolio), you might be able to minimise the CGT you’re paying.
Offsetting this is that once inside super and in pension phase, you might not ever have to pay capital gains tax, or income tax, again. If those current personally held shares have risen in value from $50,000 to $100,000, you might have to pay tax on half that gain. However, if they double again, from $100,000 to $200,000, over the next 10 years and your fund is in pension phase, then there will be no gains to pay on that gain.
The big money reasons
Consider identical $1 million share portfolios sitting both inside and outside a SMSF. Let’s assume that the shares are paying a combined fully franked dividend of 3.5%, or $35,000. If that is grossed up, the dividends are worth $50,000.
Outsider super: In your personal name, that $50,000 is added to the rest of your income and you’ll pay your marginal tax rate on it. That will be up to 46.5% for those on the top marginal tax rate.
If that same portfolio is in super, for someone in accumulation mode, the fund will pay a maximum of 15% tax on the earnings.
If the fund is in pension phase, the fund will pay nothing, but the member will have to declare the income, on which they will get a 15% tax rebate, giving a tax saving of about 15% on the marginal tax rate.
And if the fund is in pension phase for someone over the age of 60? Well, there will be no tax to pay. Not inside the fund, not outside the fund. And, in case it wasn’t clear, if there are any franking tax credits – as with our example above – the fund will receive all of those back.
But, as noted above, you’ll never have to pay capital gains tax again.
How is it physically done?
You need to find out who the share registrar is of the individual company. This will normally be Computershare or Link Market Services, although it could be a smaller player, or the company itself might run its own registrar. They both have their own forms for conducting the transfer. The forms are generally known as “Australian Standard Transfer Forms”. Computershare’s is available here and Link’s is available here.
Make sure you get these forms right. If you don’t get them letter perfect, you can waste weeks of time in the transfer process.
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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.