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.
Making super contributions
I explain how an individual can manage capital gains tax by making concessional (before-tax) contributions in the SuperGuides articles Managing CGT with super contributions and Capital gains: Reducing tax via super contributions.
Note: As an employee, the ability to make tax-deductible super contributions is limited (until 30 June 2017), although it is 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?
- Tax-deductible super contributions: No longer need to meet 10% income test
- Employees can now make tax-deductible super contributions (since July 2017)
- Salary sacrificing and super: 10 facts you should know
Anyone considering moving cash or assets into a super fund is still subject to the contributions caps applicable for the relevant year. The concessional contributions cap for the 2016/2017 year is $30,000 for under-50s (that is, for those aged 48 years or younger on 30 June 2016), and $35,000 for over-50s (that is, for those aged 49 years or older on 30 June 2016). The non-concessional (after-tax) contributions cap is $180,000 (for the 2016/2017 year).
Note: From 1 July 2017, a single annual concessional cap of $25,000 applies for all ages. Further, from 1 July 2017, the annual non-concessional (after-tax) contributions cap drops to $100,000 a 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.