Many investors have accumulated shares from floats, hot tips, inheritances or as stock options without having given much thought about how best to manage them. It’s worth considering superannuation as a simpler and more tax-effective structure in which to hold those shares.
In specie transfers
Did you know that you can change the ownership of shares through an off-market transfer? This means you can contribute the shares themselves to a super fund – Self Managed Super Funds will usually allow these transfers, as will some other super funds. From 1 July 2013 the transfer of assets for which there is an underlying market (eg. shares) will need to take place on that market. For other assets an independent valuation will need to be undertaken before the transfer takes place. The contributions may also qualify as a non-concessional contribution, so no tax will apply to the contribution.
What are the advantages?
Superannuation tax rates are much lower than personal rates. Dividends are taxed at a maximum of 15% in the super fund and after allowing for imputation credits, the tax rate can be considerably less. However, if you own the shares in your name, you may be taxed at up to 46.5%.
Capital gains tax is also lower. In a super fund, the CGT will be no more than 10% if the asset is held for more than a year, whereas your personal tax rate can be as much as 23.25% in the same situation.
Electing to transfer while the price of a particular share or batch of shares is relatively low may create a capital loss that can be offset against any capital gains you have made in the financial year. Then, if the share price recovers, the future capital gain will be in the super fund and taxed at a lower rate if they are eventually sold.
If you are self-employed, you may even be able to claim a tax deduction for the in-specie contribution. Alternatively, you could transfer the shares as a spouse contribution and claim a tax offset.
Are there any traps with this strategy?
Whilst you have retained ownership of long-term growth assets, they are now in a different tax structure. Both income and capital gains will remain in the super fund and are not available to you until you can access your superannuation – usually when you retire after age 55.
Cash from super
Generally speaking, you can’t take money out of superannuation until you retire after age 55, but you can arrange for a super fund to buy your shares from you. The cash from super can then be used for other purposes such as debt reduction, further investment or even lifestyle spending.
Changing ownership of the shares means a capital gain or loss is triggered. You have essentially moved the shares to a more tax-effective structure, which after all is still controlled by you. It is important to speak to your financial adviser before you adopt either of these strategies – there are traps for the unwary.
To find out more, please contact Fusion here or by phone on 1300 038 746.