Q: My husband and I, both near 50, plan to spend around $700,000 of our cash to buy shares soon. We don’t have a trust structure or company (both PAYG) and wondered how/if we could buy them in the name of our self-managed super fund? How do we get the cash from our names to the super fund? I’ve read about in-specie contributions – is this the same thing? I read also somewhere that CGT would only be calculated at 10% in the super fund and as it is a long-term strategy wondered whether this could be wise? Any assistance you could offer in helping us ‘educate ourselves’ would be very much appreciated.
SuperGuide is an information site rather than an advisory site so I suggest you also chat to a registered tax agent, typically an accountant, about how any tax strategy applies to your personal circumstances.
Fund purchases shares from members
A SMSF can purchase limited categories of assets from fund members or related parties. A super fund can purchase an asset if it falls into one of the following categories:
- Listed securities. A listed security listed for quotation on an ‘approved stock exchange’ or licensed market. In Australia, the approved exchanges are: the Australian Securities Exchange, and the Bendigo and Newcastle exchanges. You can also transfer international shares listed on more than 120 exchanges around the world, including London, Hong Kong and New York exchanges.
- Term deposits.
- Managed funds. The managed fund must be a widely held unit trust, typically a retail or wholesale managed fund that has more than 20 unit holders.
- Business real property. Business real property relates to land and buildings used wholly and exclusively in a business, and can include offices, shops, factories and even farms.
- In-house assets valued at less than 5% of fund assets. In-house assets are investments in, or loans to, or leasing arrangements with, related parties.
CGT relates to personal income, not fund income
If a SMSF purchases an allowable asset from a fund member, then any capital gains on the sale of that asset (by the fund member to the SMSF) is the liability of the fund member, not the super fund. The 10% tax that you refer to in your question relates to the effective rate of tax on capital gains derived within a SMSF.
Any capital gains that your superannuation fund makes from the sale of fund assets are subject to earnings tax. If the asset sold has been held for more than 12 months, then the fund only pays tax on two-thirds of the capital gain. In effect, a tax rate of 10%. I explain the taxes applicable to superannuation income in the SuperGuide article Super for beginners, part 15: Super tax – as easy as 1-2-3.
If an individual makes an in specie (non-cash) contribution in the form of listed shares or other assets, any capital gains on the transfer is again the liability of the fund members. The value of an in specie contribution will be the market value of that asset at the time of transferring the asset into the SMSF. If the asset transfer triggers a profit on the sale of the asset, the individual may have to pay tax on the capital gain. Depending on the person’s tax bill, and employment status, it may be possible to offset all or part of the CGT liability by making concessional (before-tax) superannuation contributions in the year that the CGT is incurred, subject to an individual’s concessional contributions cap.
Super alert! Since 1 July 2017, Australians with a total superannuation balance of $1.6 million or more cannot make non-concessional contributions, and Australians with a total superannuation balance of more than $1.4 million have restrictions on the amount of NCCs they can contribute. Further, Australians can transfer no more than $1.6 million into retirement phase, (see SuperGuide articles New $100,000 cap: Cut to non-concessional contributions cap and Retirement phase: A super guide to the $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap).
Making super contributions
I explain how an individual can manage capital gains tax by making concessional (before-tax) contributions in the SuperGuide articles Managing CGT with super contributions and Capital gains: Reducing tax via super contributions.
Note: As an employee, since July 2017, you can now make tax-deductible super contributions, and it is also possible to increase the amount of concessional contributions via a salary sacrifice arrangement with an employer. You may need to chat to your accountant about other possible tax management strategies. For more information see the following SuperGuide articles
- Who can make tax-deductible super contributions?
- Employees can now make tax-deductible super contributions (since July 2017)
- Salary sacrifice and super: A guide for employees and employers
Anyone considering moving cash or assets into a super fund is still subject to the contributions caps applicable for the relevant year. Since 1 July 2017, a single annual concessional cap of $25,000 applies for all ages. Further, since1 July 2017, the annual non-concessional (after-tax) contributions cap dropped to $100,000 a year (from $180,000 for the 2016/2017 year).
If an individual plans to eventually transfer personally held shares into a super fund, then the fund’s trust deed must permit in specie contributions. An individual can choose to make concessional (before-tax) or non-concessional (after-tax) contributions as in specie (non-cash) contributions.
Note: The federal government intended to ban off-market transfer of shares between individuals and their self-managed super funds, but the ban was deferred indefinitely. For more information on this issue see SuperGuide article SMSFs: Green light for off-market share transfers.