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Negative Returns Positive Outcomes

 

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:

 

Strategy 1

  • 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.

 

Strategy 2

  • 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

 

Planning for the Inevitable

Planning for the Inevitable 

Estate Planning is the process of planning during your life time to ensure that your income and asset arrangements are tax-effective and meet your requirements, both now and after death when your will takes effect.

 

·           estate planning looks at your affairs both now and after your death;

·           control of assets, now and after your death, is a critical issue;

·           you need to consider both income and assets;

·           the process is one of planning – something many talk about but do not implement.

 

Good estate planning requires a team approach.  Your lawyer, financial planner and accountant are critical participants to a good estate plan.

 

Wills

 

Most people know that a person's will is the primary document for dealing with their estate after death.

 

Great care is required in drafting wills.

 

The Supreme Court of Queensland case of O'Brien & Anor v Smith & Anor [2012] QSC 166 is a good example of how things can go wrong with a do it yourself Will.

The testator in the case made a Will leaving specific cash gifts to certain beneficiaries and then gifted his residuary estate to "a trust or other entity to be set up by my Executors...and administered by them as they shall see fit." 

The matter went to the Supreme Court because the executors were unable to determine who the beneficiaries of the residuary estate would be.  It was argued, and accepted by the Court, that the clause referring to the trust failed. For any trust to arise, there must be certainty as to the intended beneficiaries and in this case, there was no such certainty.  The end result was that there was an intestacy as to the residue which means it had to be dealt with under the Succession Act as if the testator died without a Will.

A number of parties were involved in the litigation including the executors, beneficiaries and guardians of minor beneficiaries.  The Court made orders that the costs of all parties were to be paid by the estate which is to be expected given all parties had a legitimate interest in determining the correct construction of the Will. However, such costs would have been substantial and could have been avoided only if the testator had made his Will with his solicitor.

 

If you die without a will – intestacy

 

If you die without a will then intestacy occurs.

 

Where there is an intestacy the Succession Act provides by formula who will receive your property and the share which they will take.  In many cases of intestacy it is necessary for a representative to make application to the Court for Letters of Administration which empower the representative to deal with the estate property according to the statutory formula.  This will result in additional costs to the estate administration process.

 

This article was provided by Donnie Harris Law - We provide affordable legal advice and drafting services in respect of succession, estate planning, Wills and EPOAs.  Contact Donnie Harris Law.  Visit www.dhlaw.com.au or phone or 07 4724 1016.