Author: Michelle Griffiths, Partner, TAG Financial Services
In many instances in the lead up to retirement, it is worthwhile considering what assets your clients hold outside superannuation and determine whether it would be worthwhile transferring these into superannuation, where they may be in a much more tax effective environment.
Example – David & Elise
David is self-employed and semi-retired at the age of 60 earning approximately $120,000 p.a. His wife Elise is 59 years of age and stopped working a few years ago. They have a Family Trust (“FT”) that owns various shares to the value of $1,130,000. The capital gain if they were to transfer the maximum value of shares ($660,000) into the Super Fund would be $180,000.
In a normal year without the CGT implications above, David and Elise would have tax to pay of approximately $24,234 between them.
We could potentially reduce the capital gains tax cost to David and Elise by $21,855 by claiming a tax deduction for some of the amount that is going into superannuation and therefore limit the tax cost of this transfer as follows:
* For Elise we were able to increase the amount of superannuation claimed by using the Carry Forward rules – as her balance in super was under $500,000 and she had not made any concessional contributions in the previous two years.
Therefore, the total additional tax paid due to the transfer of the shares into superannuation was $2,645, partly because we were able to use some of the superannuation contributions to reduce David’s Personal Services Income as well.
By having these shares held in superannuation for David and Elise this will initially save approximately $1,742 per annum (the difference Elise’s marginal tax rates and the 15% tax rate paid by the superannuation fund on the grossed-up dividend income).
On this basis, it would take around 1.5 years of the tax savings due to “pay for” the upfront tax cost associated with the transfer.
Further to this – once David is retired, we could also commence to pay a pension to him and Elise which would be largely tax-free (as there is such a high tax-free component). This would mean that the super fund earnings would be tax-free and would therefore create an additional tax saving of approximately $4,300 per annum. If this were the case, the tax savings would meet the initial tax costs within the first year and therefore would be an even more attractive option.
Other options for David and Elise?
There may be additional ways to reduce the initial cost of this transfer: including:
- Splitting the transfer over 2 financial years (and therefore reducing the tax payable further) or
- Waiting to do the transfer to when David is fully retired and not earning other income.
Timing may be a factor:
- It may be that the timing of when we would like to take advantage of the bring forward contribution rules for Elise, or
- the fact that we want to be able to transfer the rest of the shares in after David retires fully have influence the decision.
This is why there needs to be a longer-term view approach taken to these scenarios to get the best long term result for the client.
The same principles can also be applied using the transfer of property – however this requires more care as the additional steps, legal requirements and stamp duty and GST considerations have an added complexity to be considered in addition to the income tax implications.
Other potential costs of an in-specie transfer
There are often more costs associated with the transfer of assets than just the tax consequences noted above. This may include:
Capital Gains Tax by the member transferring the asset (as the transfer in-specie of an asset represents a sale by the contributor and purchase by the Super fund for Capital Gains Tax purposes).
Potential GST considerations – if the contributor is GST registered, there should be GST on the transfer of the asset. In this case you must consider if the Super fund having the asset transferred to them should be registered for GST to get the advantage of the Going Concern exemption or be able to claim the GST on the purchase. If there was no consideration paid, this complicates things and you should seek advice relating to your specific circumstances to ensure the going concern will still be applicable in these instances – this will depend on the relationship of the contributor and the superannuation fund in these cases.
Stamp Duty on the transfer of property needs to be considered. There are some exemptions in various states where there is no consideration, and the member is essentially contributing the asset to the superannuation fund for themselves.
Other transaction costs may include:
– Brokerage / registry fees for processing the change of ownership forms to enact the in-specie transfer of listed shares.
– Legal fees associated with the transfer of the asset.
– Financial advice fees – for the recommendation on transferring the assets, and providing the guidelines and actions required. As mentioned earlier, given the nature of the advice being provided, potentially selecting assets to transfer and certainly also starting pensions all require financial planning advice (Statement of Advice) to recommend these actions to a client.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.