SUMMARY: Time to start considering some tax planning after another good run for shares. So let’s revisit in-specie transfers to your SMSF.
There was a time, fairly recently, when SMSFs trustees were considered liars and frauds in the eyes of the government (and the Treasury).
At least in regards to the in-specie transfer of assets into SMSFs.
The ability to “rort” the system was considerable (as I pointed out in this column 28/9/11). So the government announced in 2011 that it would close down the ability for SMSFs to make in-specie transfers.
But it tripped and stumbled. It was far more complex to implement than originally believed. And they eventually ditched the idea, in July last year, claiming that it was no longer the issue that it had once been.
It was helped by the fact that Computershare and Link Market Services, who process share transfers, slapped on $50-60 processing fees around that time, which considerably dampened demand for a service that had been previously free.
So the ability to make in-specie transfers still exists, even if interest has waned. And it’s a legitimate way to put shares and potentially property into your SMSF, and to help you reduce some tax.
Transferring shares into your SMSF
In recent weeks, there has been a sell-off on the Australian market. Not for the first time since this bull run started in May 2012.
The overall run will have bought great gains for many investors – both inside and outside of their SMSF. Gains are good. But gains also require tax to be paid if upon sale.
There will be plenty of trustees who wished they’d bought all of those shares inside their SMSF in the first place. That could leave them with the possibility of paying no CGT (if in pension phase) or tax at 10-15% (in accumulation).
Of course, there is no CGT to pay if you don’t sell. Sometimes taking gains is necessary. Sometimes taking the pain of CGT now can be worth it if it sets up tax-free gains in the future.
Why would you? If the shares are ones that you wish you’d purchased inside your SMSF, the recent sell-off could be the opportunity to take stock, take the gains (reduced a little by the recent falls), but then get those shares into super where they might never be taxed again.
For example, say you bought 1000 Westpac shares for around $22 ($22,000) back in mid 2012. They peaked near $35 in October and have since fallen back to around $30.
The gain on those shares now would be $8000 – compared with $13,000 at the height of the market – with tax at your marginal rate paid on half of that gain (if held longer than a year).
Setting off CGT now
The act of transferring the shares into your SMSF sets off a CGT event for the disposal, based on the price set at the time of transfer.
Your fund then picks up those shares at that price. Whether it pays gains on those shares in the future will depend on whether they are sold while the SMSF is in accumulation phase (10-15% tax) or pension phase (0%) tax.
(On top of that, the dividends will be taxed at either 15% if in accumulation phase or $0 if they then become an asset backing a pension.)
A crucial point as to whether this concept makes sense or not is the determination of whether the CGT to be paid will be made up for by the lower tax arrangements in your SMSF.
Concessional or non-concessional?
The shares can potentially be contributed into your SMSF under either the concessional contribution (CC) or non-concessional contribution (NCC) limits.
NCCs are reasonably straightforward. See this column (24/6/13) for who can contribute NCCs and their benefits. All Australians under 65 can make them, while those up to 74 can make them if they meet the work test.
But making in-specie contributions of shares as a concessional contribution, where you claim a tax deduction for the contribution, is a little trickier. You need to be able to make the contribution as a personal deductible contribution.
You must be eligible to contribute to superannuation, the contribution must be made to a complying fund and the deduction must be claimed in the year the contribution is made.
But if you earn more than 10% of your income as an employee, then you are unable to make a personal deductible contribution. So this will exclude most employees, plus many others who earn part of their income as an employee.
The self-employed and self-funded retirees are going to be most likely to be able to make the in-specie contribution as a deduction.
If you’re turning 75, then the contribution needs to be made on or before the 28th day after the end of the month in which you turn 75. So, if you turn 75 today (10 February), then you need to make the contribution before the 28 March.
A valid deduction notice, in an ATO-approved form, must also be made to the fund trustee.
It also needs to be made under the concessional contribution limits, which is $25,000 for the under 60s and $35,000 for the over 60s. (From 1 July 2014, it is expected that the $35,000 concessional contributions cap will be extended to those over 50. There has been no word from the Coalition government on a change to this rule, so it can be assumed, for the moment, that this change will continue.)
And, obviously, if it is made as a concessional contribution, the fund will then also have to pay contributions tax (15%) on the contribution – which you would also need to take into account in determining if this makes sense in your situation.
Some of the gloss has come off
Yes, some of the gloss has come off in-specie contributions as a strategy. The damage was more done by the share registrars (Computershares and Link) charging for the service ($55), which was previously free.
Often, it would be simpler to avoid the paperwork and simply sell the shares, get the cash and put it into super, then repurchase the assets.
But for some, that could leave you out of the market for a period of up to a week. Sell the shares, receive the cash in T+3, transfer the money into super, then purchase the assets.
In-specie contributions can ensure that you’re not out of the market.
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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.