The Ultimate Tax Rate:  0%

The tax rate on your SMSF earnings and capital gains before you commence a Pension is 15% or 10% for capital gains on assets sold that have been held for more than 12 months.  The tax rate on your SMSF earnings and capital gains falls to 0% when you commence a Pension from your SMSF.  This is as good as it gets. No tax on your investment earnings and capital gains. Conversely the tax rate on investments held in your personal name can be up to 46.50%.  This makes it extremely attractive to consolidate all investments in your SMSF in the lead up to your retirement.

Ability to Consolidate Non Super Investments

Members of a SMSF traditionally make contributions in cash.  However it is possible for Members to make contributions of assets directly into the SMSF instead of cash.  These types of contributions are called "in specie" contributions.  Importantly only certain assets listed in the Super Laws can be transferred in specie by a Member.  If the asset is not specifically listed in the Super Laws, it is illegal to transfer an asset owned by a Member into the SMSF.

Assets that can be transferred In Specie

The only assets currently allowed to be transferred to a SMSF from a Member (or an associate of an SMSF Member by blood or marriage or entity controlled by a Member) are as follows:

- ASX Listed Securities
- Widely Held Managed Funds
- Business or Commercial Property
- Cash Based investments such as Bonds and Debentures.

Importantly whilst a SMSF can purchase Residential Property from a person who is not an Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member), a SMSF cannot purchase Residential Property from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) even if the purchase is at market value. This is illegal!  For more on In Specie Transfers click here.

Transfers must be at Market Value

All In Specie Transfers of assets from a Member (or an associate of a Member including family members by blood or marriage or entities controlled by the Member) must be transferred at Market Value.  The Market Value must be clearly detailed in the Off Market Transfer Form prepared for the transfer of ASX Listed Securities or Managed Funds or in the event of Commercial Property in the Transfer Documentation.  To the extent that the asset is transferred to the SMSF at a value under Market Value the transfer will be "deemed" to be at Market Value.

Tax Savings

Consolidating investments outside your SMSF into your SMSF can produce significant tax savings over time.  For example assume you have a Share Portfolio in your personal name valued at 300,000.  Assuming you are on the top marginal tax rate you will pay up to 46.50% on the income and capital gains generated by the investment.  Assuming income of 3% per annum this equates to around $4,000 in tax per annum payable on the income.  Worse still, assuming the investment doubles every 10 years (a generally accepted investment principle) the capital gains tax bill on sale would be approximately $70,000.

Whilst you may not plan on selling the investment, eventually the investment will be sold even if by your beneficiaries after you die as the tax bill will not die with you.  By transferring the Share Portfolio into your SMSF, the tax on the annual investment income will fall to $1,500 per year (a tax saving of $2,500 each year) and to $0 after you commence a Pension (a tax saving of $4,000 each year).  In addition there will be no tax on the capital gain in your SMSF if the shares are sold after you commence a Pension.  In the above example this can equate to a tax savings exceeding $100,000!

Catch Number 1:  Assets Preserved until Retirement

Whilst there can be significant tax savings by transferring assets from your personal name to your SMSF, there are several catches which must be carefully considered.  The first is that transferring assets to your SMSF "traps" the assets in the SMSF until you are at least age 55.  So whilst it may be tax advantageous to transfer assets to your SMSF you must ensure that it is money you will not require until at least age 55.  

Catch Number 2:  Stamp Duty

Stamp Duty may be payable on Managed Funds and Commercial Property Transfers and should be carefully considered prior to transferring these assets to your SMSF.  Accordingly you will need to contact the State Revenue Office or your solicitor to discuss the Stamp Duty implications associated with any transfer strategy where it involves Managed Funds or Commercial Property.  There is no stamp duty on share transfers.

Catch Number 3:  Capital Gains Tax

Because there is a change in ownership of the asset transferred (from you to the SMSF), the asset transferred is deemed to have been sold resulting in possible CGT implications on the transfer namely:

- If the asset has been held for less than 12 months, any capital gain on the asset transferred will be realized and the full amount of the capital gain will be included in your personal taxable income.

- If the asset has been held for more than 12 months, any capital gain on the asset transferred will be realized and 50% of the capital gain will be included in your personal taxable income.

- Any capital loss on the asset transferred will be realized and will be included in your personal taxable income.

This means that to the extent there is a capital gain on the transfer of assets into your SMSF the capital gains tax cost needs to be considered before implementing this strategy.  In some cases shares will have been held for many years and the capital gains will be significant.  However this does not automatically mean that you should avoid this strategy for fear of paying some tax now.

Minimising Capital Gains Tax on Asset Transfers

Let's assume that you have held shares valued at $450,000 in your personal name and have an unrealized capital gain of $150,000. You are close to retirement and are keen to consolidate your personal investments into your SMSF with the knowledge that earnings and capital gains in the SMSF will be tax free when you commence a Pension. 

If the shares are transferred whilst you are still working, and assuming you are on the top marginal tax rate, you will trigger a $150,000 capital gain.  After applying the 50% CGT exemption, $75,000 will be taxable at the top marginal tax rate of 46.50%.  A tax bill of $34,875!  Ouch!

If however you defer the transfer until the first year after you stop working and assuming you are under 65 you can dramatically alter the tax bill. This is because you will have no salary income in the year of the transfer and you also will be able to claim a tax deduction on the transfer (up to a maximum of $50,000) given you are not working.  In the same example after claiming the maximum tax deduction on the contribution of $50,000, this will reduce the taxable capital gain to only $25,000.  Tax on the capital gain is in turn reduced to only $9,225 (ie $7,500 on the $50,000 super contribution at a tax rate 15% and $1,725 on the $25,000 capital gain remaining in your personal name).  This is a tax saving of $25,650!

Value Judgment

In the above example the Investor will enjoy tax free income on the $450,000 transferred into the SMSF as well as paying no tax on the capital growth on the investment once a Pension is commenced in the SMSF.  Assuming that the investment generates 8% in income and realized capital gains per annum, the $40,000 will be tax free to the SMSF after the Member commences a Pension.  This is a tax saving of $5,000 per annum compared to the tax payable had the income and realized capital gains been derived in the Member's personal name.  Over an average retirement period of 30 years this can add hundreds of thousands of dollars to your final Super Benefit.  In the above example the value judgment that the Investor must make is this: Is it worthwhile to pay $9,225 in tax today to save $5,000 in tax every year on the $450,000 Investment.  We think it definitely is, because after two years you will have recouped the original tax bill of $10,000.  Future tax savings will be yours to keep.  However this is our opinion and you will have yours.  This is the value judgment each Investor faces when considering consolidating investments outside super into their SMSF.