Boost your super and manage CGT with share transfers into your SMSF
With changes to super making it harder to use non-concessional contributions after 30 June, many savers are looking for strategies to boost their retirement funds before the rules change. And if you have a self managed super fund (SMSF), a little known strategy called ‘contribution reserving’ could provide you with up to $60,000 in tax deductions this financial year if you’re eligible to use the maximum contribution limits.
If you’re a share investor, moving your portfolio into super could be very beneficial
Unfortunately, the resulting capital gains tax (CGT) often seems like a barrier to implementing this strategy, but contribution reserving can help you offset that CGT event, allowing you to act this financial year.
Contribution reserving is a strategy unique to SMSFs and enables trustees to use up to two years’ worth of concessional contributions in the same financial year – this also allows you to bring forward next year’s tax deduction meaning almost double the tax deductions this year compared to the deductions available when just one year’s worth of contributions is made. This strategy can be used to help with CGT that arises from the sale of investment properties and other investment assets including shares.
You may not have to sell your share portfolio to use this strategy
Because SMSFs can accept in specie transfers of listed shares, as an investor you can move your portfolio directly into the tax-favourable super environment. This is very attractive if you have an emotional attachment to the portfolio – often the case when inherited from a family member or if you’ve spent years building it up.
It’s important to note in specie transfers still create a CGT event, but employing the contribution reserving strategy alongside the maximum non-concessional contribution limit of up to $540,000 could allow up to $600,000 of investments per person to be moved into super before 30 June – while managing the CGT bill.
Contribution reserving is a complex strategy to administer but is well worth the effort
To correctly administer contribution reserving, you’ll need to work closely with your accountant and your SMSF adviser. Your accountant will need to calculate your expected taxable income, ascertain the final capital gain after allowing for any prior years’ losses and discounts, and determine if you can meet the strict eligibility criteria to apply contribution reserving. You may also need to engage your SMSF adviser to ensure your SMSF is set up in the right way to receive future years’ contributions, which generally requires a reserving account to be established.
To implement the strategy, you will need to make a concessional contribution to your SMSF using the standard 2016–17 limits of up to $30,000 for individuals under 50, and $35,000 if you have reached 50 years of age. A second and separate step requires the bringing forward of your 2017–18 concessional contribution – a maximum level of $25,000 – into June 2017, to enable you to claim the additional tax deduction in this current financial year.
Overall tax savings in comparison to paying full CGT could be between $10,000 to $20,000
Your SMSF will pay contributions tax on the concessional contributions outlined above. But, the overall savings – when compared to paying the full capital gains tax on an in specie transfer of listed shares – could be between $10,000 to $20,000 for those in the tax brackets of 34.5 per cent or 49 per cent respectively and who can make the maximum contribution for both years.
The good news is additional tax benefits are likely to accumulate each future year, as your investment capital will now be housed in the concessional tax environment of super. Remembering that up to $1.6 million can be held in retirement pensions tax free; this strategy could allow significant amounts of earnings to be retained and reinvested for your future expenses.
If you don’t have access to the retirement pension phase of super, the accumulation phase is also very attractive when compared to personal marginal tax rates. Income generated inside these accounts (such as dividends and bank interest) are taxed at 15 per cent and capital gains are taxed at 10 per cent (if the investment is held for at least 12 months).
With the 30 June deadline looming, it’s important to get advice now
Over time, holding your investments in a lower tax environment can result in significant savings. Knowing there’s a way to manage the CGT, you should consider if you meet the eligibility criteria, which apart from the standard age and work test requirements, generally requires that your income from an employment is very small. You should expect to incur some additional fees for the required paperwork and the assistance of your adviser and accountant. This is necessary because if the order and timing requirements aren’t met or your calculations are out, your contribution may be disallowed.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
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