Many people would have enjoyed the thrills, sounds, and smells of the various carnivals to pop up during the recent summer holiday period. But, as the carnivals pack up and move out of town, it seems that someone forgot to tell global share markets to get off the roller coaster!

With global uncertainty seemingly set to continue throughout 2012, now might be an opportune time for investors to consider what to do with existing shareholdings.

Two of the options likely to be going through an investor’s mind are:

1.  Do I continue to hold?

2.  Do I sell?

However, a third option effectively provides a combination of these. That is:

3.  Do I transfer them into my self-managed super fund (SMSF)?

A better tax outcome

Ultimately, a decision will be made based largely on the investor’s beliefs about the future of share markets and their continued willingness to ride the highs and lows that are part and parcel of investing in shares.

However, where an investor is prepared to retain their exposure to shares, transferring those shares into an SMSF is likely to provide a better tax outcome when the market upswing kicks in.

It is widely accepted that super is an extremely tax-effective way to save for retirement. Some of the key reasons for this are that investment earnings (including dividends) received by an SMSF are taxed at a maximum rate of 15%, capital gains tax (CGT) is generally capped at 10%, and once a pension commences at or near retirement, the tax rate on both income and capital gains within the fund reduces to 0% – compare that to paying tax at one’s marginal tax rate (typically 30% – 45%)!

When you add to this the fact that once a person reaches age 60, any superannuation withdrawals are received completely tax-free to them personally, it’s not hard to see why super provides a tax effective environment for retirement savings.

The strategy

However, the Government places limits on how much someone can put into their super fund each year. For example, for people under 65, these limits generally allow $150,000 in contributions a year as well as an ability to bring forward the next two years’ contribution limits – allowing $450,000 in the one year.

So, with investment markets and asset values having fallen, now might be a good time to transfer a share portfolio into the tax-effective superannuation environment while remaining within the contribution caps.

Example 1

Jim is 52 and has a share portfolio that is in his own name. He would like to retain this portfolio because he expects markets to bounce back.

This time last year the portfolio was valued at $510,000 and he was unable to transfer the entire portfolio into his SMSF because this was above the allowable limit of $450,000 over three years. However, his portfolio is now valued at around $440,000, so Jim can now transfer it into his SMSF without breaching his limit.

By transferring the portfolio into his SMSF, Jim has ensured that any future dividends and capital gains are concessionally taxed at super tax rates as opposed to tax at his personal rate.

It should be noted that CGT may be personally payable by Jim if an overall capital gain has been made on this portfolio. However, in many cases, this tax liability can be reduced by claiming a tax deduction for the contribution.

Example 2

Let’s assume that the cost base (for tax purposes) of Jim’s share portfolio was $390,000 and that he is self-employed.

Following his $440,000 transfer (or contribution) of the portfolio into his SMSF, Jim could elect to claim $50,000 of the contribution as a personal tax deduction, effectively wiping out his personal CGT liability.

Alternatively, if an overall capital loss had been triggered, this loss would be available to Jim to be used to reduce any realised capital gains, or carried forward to be used against a future capital gain on other investments such as an investment property.

Game changers

Also, there are a number of important changes due to kick in from 1 July this year that Jim will need to consider.

Firstly, available tax deductions for those aged 50 or older will be reduced to $25,000 – or at least an additional limit introduced.

Secondly, there is likely to be a change requiring future transfers of shares be done ‘on-market’. This change is likely to result in increased brokerage costs and complexity with a risk of being out of the market.

So, for investors who are thinking of moving assets into the tax effective SMSF environment, the lead-up to the end of the financial year might prove a crucial time.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in the Switzer Super Report

• Peter Switzer: A rate cut is coming, but will the banks follow?
• Charlie Aitken: Strong gains, plus three stock buys
• Ron Bewley: How many stocks should be in your SMSF portfolio?