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.
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 28/9/11 and 11/4/12.
Shares prices down … means so is CGT
What’s different now? The ASX/200 is sitting at around 4100 points when just seven weeks ago, it was sitting at 4500 points. A lot of your favourite stocks have been belted 20% or more.
BHP Billiton is down from $38 to below $32, Rio Tinto is off from $72 to $56, Toll slumped from $6 to $4.25, AMP has slipped from $5 to $3.90 …
But here’s where Newton’s third law (“for every action, there is an equal, but opposite, reaction”) can be used to a 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 wad 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.
The link for companies with Computershare is here (https://www-au.computershare.com/investor/eforms/servlet/SmartForm.pdf ) and for Link Market Services, it’s here (http://www.linkmarketservices.com.au/corporate/downloads/Forms/change-details/Off_Market_Transfer_form.pdf ).
And the benefits of doing it now?
Lets say you bought $20,000 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. (Take any parcel of shares, or even a portfolio of shares.)
Transferring those shares into super sets off a few things. First, transferring it from you to your super fund creates a capital gains tax event. There’s 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 $7500 difference in capital gain of $3562.50 (using a 47.5% marginal tax rate to take into account the marginal tax rate, 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, yes, I hadn’t forgotten. 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 you deciding to 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 1 July?
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, and then repurchase them.
They have 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 transfer will allow you to transfer shares without that particular timing issue coming into play.
But it’s still a contribution to super?
Yes. They 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 it relates 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.
The proper way of doing it is to fill in, sign and date the transfer forms and send them in the same day. However, trustees were known to fiddle the forms and could, potentially, choose the lowest point over the last month or so and make sure the paperwork was signed and dated for that day, before sending it in for the transfer to take place.
By reducing the purchase price, trustees were able to manipulate capital gains. It also might allow them to get more contributions in under the caps.
Anyway, 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 falls, you need to act quickly.
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 highly complex and require high-level technical compliance.