The Bull

Monday 22

January, 2018 1:49 AM

Super & Retirement question

Do you pay tax when rolling shares into a self managed super fund?

Do you pay tax when rolling shares into a self managed super fund? Jeremy Gillman-Wells

I have $100,000 worth of shares in my portfolio and I would like to roll it over into my self managed super fund. Will I pay tax on the rollover, and if so how much? When I have it in my self managed fund and I want to trade on any of these stocks, will I have to pay capital gain if there is a gain?


Transferring shares from your own name to superannuation can be done directly. This means that you do not have to sell the shares, contribute the cash to superannuation and then repurchase the shares. You can simply transfer the shares off market and this is called an in-specie contribution.

Now although superannuation is a highly tax effective structure once the money is in there - and particularly in terms of retirement income streams after age 60 (that is, it is hard to beat tax free) - there are still tax issues with how you make contributions to actually get money into the superannuation environment.

Most commonly, the tax issue with an in-specie contribution is capital gains tax in your personal name. So what follows is an explanation of capital gains and shares - but it is not exhaustive - to be so, we would need volumes. It's the basics and you are strongly advised to consult your qualified accountant for all your detailed tax planning.

According to the ATO, capital gains tax (CGT) is payable on the capital gain made on disposal of a CGT asset which was acquired on or after 20 September 1985. A capital gain will generally arise where the proceeds from the CGT event are higher than the initial outlay. In other words, the capital gain is the difference between the cost base of your shares (or property or other CGT asset) and the proceeds from the sale.

By way of example:

    * Buy 100 BHP shares for $8 each (disregarding brokerage) = $800 cost base
    * Sell 100 BHP shares for $38 each (disregarding brokerage) = $3,800 proceeds from sale
    * Difference: $3,800 - $800 = $3,000 gross capital gain

"But hang on" I hear you say - "I'm not selling my shares. I'm just transferring them in-specie into my super fund and I'm not receiving any money for that".

The concept of triggering a capital gains tax event is commonly misunderstood. Most people understand that an asset is said to be acquired when you buy it. But the asset is also "acquired" when you inherit it, construct it or receive it as a gift.

Similarly, an asset is disposed of when a CGT event occurs - most obviously selling it. However the asset is also said to have been disposed of for tax purposes when you give it away, change ownership off market (as is the case with an in-specie contribution to super), or even when it is lost or destroyed.

Now bear in mind that you may not have to pay any tax - you have triggered a capital gains tax event, not necessarily a capital gain!

A capital gain will usually be disregarded if the CGT asset was acquired before 20 September 1985. So for those holding "pre-85" shares or property, making and in-specie contribution can be an excellent way to move the shares tax free into an ongoing highly tax effective environment.

A capital loss occurs when your transfer value is less than the total outlay. Basically, the above example in reverse.

Capital losses can be used to offset any capital gains made during the income year. Or, if you do not offset all the capital losses against capital gains in the current year, then you can carry the left over loss forward to future years. Importantly, capital losses cannot be used to offset tax on any other income. So if you lose $3,000 selling XYZ shares (and you are not classed as a trader), you cannot offset your capital loss against your wage or business income - only other capital gains.

For in-specie superannuation contributions, capital losses can be a good strategy. Say for example you want to transfer your BHP shares that you have made good gains on into your super fund. Ordinarily this would present a tax problem. However, let's say that you also own Babcock and Brown shares which have incurred a capital loss. Transferring both lots of shares into superannuation could mean that you have no capital gains tax to pay because the loss offsets the gain (as described below). Or if you wanted to transfer the BHP shares (to keep them in the fund) and sell the Babcock and Brown shares (because you did not want to retain his company), you would still end up with the same tax result.

Now to calculate your personal CGT (due to the in-specie transfer), you can use any of the methods below. The method chosen will affect the way capital losses are dealt with.

Full capital gain method for calculating the amount of CGT payable for assets held less than 12 months:

   1. Calculate the cost base for each part of the asset: (cost of shares plus brokerage)
   2. Calculate the assessable capital gains: Consideration (value on the day of transfer less brokerage) minus Cost Base
   3. Offset any capital losses.
   4. Add capital gain to other assessable income to determine overall tax liability. That is, the assessable capital gains is taxed at your marginal tax rate. So let's say that the capital gain on your $100,000 share portfolio is $25,000 and your normal income from wages is $50,000, then your total assessable income will be $75,000 for that financial year.

Effectively, you will be taxed at 30% plus Medicare on the transfer.

50% Discount method for calculating the amount of CGT payable for assets bought on or after 11:45 AEST 21 September 1999 and held for at least 12 months:

   1. Calculate the cost base for each part of the asset: (cost of shares plus brokerage)
   2. Calculate the assessable capital gains: Consideration (value on the day of transfer less brokerage) minus Cost Base
   3. Offset any capital losses (from the same financial year, then prior years)
   4. Calculate 50% allowance (for assets held for more than 12 months): Assessable capital gains x 50%
   5. Calculate nominal gain: Assessable capital gain - 50% allowance
   6. Add your nominal capital gain to other assessable income to determine your overall tax liability.

So here's another example using our BHP shares from above.

    * Step 1 = $800.
    * Step 2 = $3,800 - $800 = $3,000.
    * There are no losses so that's step 3.
    * We've held the shares for 2 years so we get the 50% discount, which means step 4 = $1,500.
    * Step 5 means our nominal gain is now ($3,000 - $1,500) = $1,500.
    * Step 6: If you earned $80,000 for the year including your income from wages, bank interest and dividends, then the ATO says add the capital gain and we will now tax you as if you earned $81,500 for the whole year. In this case, your gain of $1,500 will effectively be taxed at 41.5% because that is the marginal rate including Medicare.

For shares bought pre 11:45 AEST 21 September 1999 and held for at least 12 months you can also use the indexation method but it's too complex to discuss here, so again, check the details with your tax adviser. Even if you can apply the indexation method, the 50% method generally works out better - i.e.: less tax to pay.

Bear in mind that if you hold the shares for more than 12 months then CGT is really a pretty cheap form of taxation. The worst case is tax of around 23% (or 46.5% x 50%) of the gain. Most people earning even a basic wage pay a marginal tax rate of 30% + Medicare levy so in that context, it is not the end of the world.

So to minimise capital gains tax on in-specie transactions:

    * hold the shares for more than 12 months before transferring them,
    * transfer the shares in a financial year when your income from other sources is low,
    * offset capital gains against capital losses,
    * make sure your other income is low by using a salary sacrifice to super strategy, and/or
    * if you are self-employed (or earn less than 10% of your income from an employer), claim a tax deduction for the in-specie contribution.

Now comes the fun part! When you would like to trade shares in your self managed fund, you are now operating in the highly tax effective superannuation environment. The capital gains treatment is as follows:

Accumulation phase:

    * if you hold the shares for less than 12 months, the maximum tax you will pay is 15% of the gain, and
    * if you hold the shares for more than 12 months, the superannuation fund is entitled to a one third discount on the capital gain - so the maximum tax you will pay is 10% of the game.

Pension phase:

    * generally this means you have commenced a transition to retirement income stream or you are permanently retired and drawing an account based (allocated) pension
    * zero tax to pay on capital gains (and any income/dividends for that matter)!

As an added bonus, irrespective of whether you are in the accumulation or pension phase, your tax liability will be reduced by the refund of any imputation credits.

The tax world is a jungle - but if you plan well enough in advance, then you can much better execute a tax effective transfer of shares from your own name to your superannuation fund.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.

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