Volatility and negative returns still affect local and international investments. Depending on purchase dates & costs, some shares remain below their prior highs. If this applies to your situation, read on for a way to turn this into a positive outcome.
It is likely a number of us have some form of blue chip investment in our portfolio that are still worth less than what we purchased them for, but we know they are keepers for the long term. Whilst an unpleasant feeling for most, lower values can present a good opportunity to create useful outcomes from 'bad' investment returns.
If you have not done so in the prior GFC slump era, now is still an opportune time to consider potentially transferring existing investments between entities, such as from your own name into a Self Managed Super Fund (SMSF), Family Trust, or lower income spouse.
The advantages are:
- you retain control or ownership of the investment, albeit in a different entity;
- you secure a 'capital loss' for the original owner to offset against future capital gains tax from other investments;
- the investment is now held in a lower tax environment, such as superannuation, which in turn leads to; better tax outcomes on income returns, including any franking credit treatment and future capital gains tax implications;
- it may also aid in any succession or estate planning issues.
Below are examples of strategies of turning a negative return into a positive outcome, by transferring personally held shares into a SMSF:
- Make an 'In Specie' or 'Off Market' transfer into the SMSF of the selected investments, (put simply, the ownership of those assets are transferred to the superannuation fund).
- This is deemed to be a contribution to the superfund, so be conscious of any limits or contribution caps that may apply. The person/s who own the shares are seen to be the ones making the contribution.
- No money changes hands in the transfer
- It is seen as a disposal of the asset and therefore the two cost considerations are Capital Gains Tax (CGT) implications and Stamp Duty. With regards to shares, since 1 July 2001, stamp duty on trades in marketable securities has been abolished, leaving only CGT as a consideration. As per the strategy, if transferring for less than the original purchase cost, this will be a loss to you personally.
- Depending on the type of contribution you make, concessional or non-concessional, the super fund will be required to have enough cash to pay contributions tax on the amount of any concessional contribution.
- Depending on your employment situation, a concessional contribution could also assist in lowering your own personal tax payable. This method may be particularly handy if you are self employed and/or personally cash poor at the moment.
- This is essentially the same, but rather than making an 'In Specie' transfer, the SMSF purchases the investment from you off market but at an arm's length fair market value. This will avoid brokerage costs, but must be done at the market price of that day.
- The advantage in this is that money is released from the super fund to you personally in the transfer, which may assist with cashflow for you
- No limits or caps apply as this is not seen as a contribution and cannot be claimed as one. Therefore attaining other personal tax benefits from a concessional contribution is obviously not possible, but all the other advantages of the above strategy apply.
A real life example of this is a very widely held share that was issued by float, AMP shares:
Assuming received in float 2000 AMP shares at $10.43 base price which are valued at $ 5.64 at close 25/11/2014 which is the date of off market or in specie transfer to the fund.
This realises a Capital Loss of $ 4.79 per share x 2000 shares = $9,580 that can be used to offset against future personal capital gains for the original owner.
The client's SMSF retains ultimate ownership of the shares but they are now in low tax structure for future income from dividends and franking credit advantages. Further potential benefits are likely on any future share sales, as a SMSF also receives a concessional Capital Gains Tax treatment.
These strategies are potentially more valuable to high income earners who either received shares through various floats over the years, or purchased shares in their own names. The same logic could be applied to those without Self Managed Super Funds who simply wish to transfer share ownership into their low income spouse or other family member or family trust or entity.
Please note, this is not personal advice and we recommend that you seek specific individual advice from a qualified professional before taking any action.
This article was provided by Ian Byrne - CFP Ibessa Strategic Financial Specialists. For further information you can contact Ian Byrne on 07 4041 6299