How to use your DIY super fund to save your share portfolio

Investors can use their self-managed super funds to help salvage personally-owned share portfolios that have been ravaged by the bear market.

A series of innovative strategies may prevent you from being forced to sell any of your top shares at depressed prices on the open market and ensure that their future capital gains are made within the concessionally-taxed (or tax-free in certain circumstances) superannuation regime.

Further, there are opportunities to claim large tax deductions, generate capital losses, and to protect the share portfolio from possible claims of future creditors.

In short, these strategies revolve around transferring ownership of the shares from your name into your self-managed fund. But while doing this, you should be aware of what types of arrangements that the tax commissioner may attack under his anti-avoidance powers.
Underlining these strategies is the provision in superannuation law that listed shares are among the few non-cash assets that funds can legally acquire from their members. Super law specifies that the transactions must be conducted on an arm’s length basis, which includes being based on market values.

Here are four strategies for investors to consider: 
 

1. Contribute at least part of your personally-held share portfolio to your DIY fund

Opportunities:

This strategy has multiple advantages. Foremost, you will no longer face the possible risk of being forced to sell blue chip shares on the market at seemingly giveaway prices. Your shares will be locked in your super fund for your retirement.

And when the market inevitably recovers, the subsequent capital gains will be sheltered in superannuation. This means that these potentially breathtaking long-term gains will be either concessionally taxed, or tax-free if sold when the assets are backing the payment of a pension.

Further, self-employed business owners and eligible members outside the paid workforce can claim tax deductions of up to $100,000 a year, depending on age, for their personal contributions. These deductions apply to non-cash contributions, including listed shares, as well as conventional cash contributions.

It is possible for a member age over 50 to contribute a total of $550,000 in a single year through what are known as concessional and non-concessional contributions. (These contributions and their annual contribution limits are explained in the next ‘warning points’.)

And finally, the change in ownership from your name to your self-managed fund could crystallise valuable capital losses that you can offset against current-year and future capital gains.

Warning points:

You will face excess contributions tax if your contributions exceed annual limits. This is a key point to watch with the strategy of contributing personally-owned shares to your self-managed fund.

The current contribution caps are:

– Non-concessional contributions – no tax deductions are claimed on these types of contributions – are $150,000 in a year, or $450,000 every three years.

– Concessional contributions – tax deductions are claimed when contributed – are $50,000 a year if under 50 or $100,000 a year if over 50. 
 

2. Sell at least your personal-held share portfolio to your DIY fund

Opportunities:

This strategy has similar advantages to contributing shares to your fund.

Principally, you will no longer face the possible risk of being forced to sell quality shares at prevailing prices on the open market. Future capital gains from a recovering market will again be sheltered in the concessionally-taxed super system. And again, the transfer of ownership to your self-managed fund is also likely to trigger capital losses.

There is the added advantage that the money your fund pays for your shares may provide a much-needed boost to your business or personal finances as the economy slows.

Significantly, the contribution limits, of course, do not apply when your DIY fund buys your shares.

Warning points:

Superannuation and tax lawyer Peter Bobbin, senior principal of The Argyle Lawyers in Sydney and Melbourne, says investors selling their shares to their self-managed fund should be careful about so-called “wash-sale arrangements”.

Wash sales occur, according to the Australian Taxation Office, when a taxpayer disposes of an asset to generate a capital loss but there has been no significant change in the taxpayer’s economic exposure to the asset. The tax commissioner has issued a ruling and a tax alert warning that these arrangements, in his view, amount to tax avoidance.

Bobbin says that your dominant purpose for selling your shares to your super fund should be to save for your retirement in an effective and concessionally-taxed way – not to generate tax losses. He suggests that funds prepare a new written investment strategy that takes the new share portfolio into account. “This demonstrates the intention to invest for retirement, not crystallise capital losses.”

3. Lend your DIY fund the money to buy your personally-held shares at market price

Opportunities:

This is a twist to the second strategy, with some similar advantages.

Bobbin suggests that the strategy may appeal to investors who want to transfer their private share portfolios into their funds but the portfolios’ value exceeds the annual limit on concessional and non-concessional contributions. And their fund may not have enough cash to buy shares.

The transfer share of ownership from your name will almost certainly generate tax losses, given the state of the market, but again that should not be your dominant purpose for undertaking the transaction.

Since amendments to superannuation law in force from September 2007, funds have been unequivocally permitted to borrow to invest under stringent conditions.

The amendments stipulate that the geared investments must be held in a so-called “bare” trust until the final payment, and that the lender must not be given security over any of the fund’s other assets. (Legal ownership of the shares remains in the trust until the final payment yet the beneficial interest is held by the trustees of your super fund.)

Let’s assume you want to transfer a privately-owned share portfolio with a market value of $900,000 from your name into your self-managed fund.

Bobbin says a person who is, say, over 50 might consider transferring this portfolio into their fund with, say, a non-concessional contribution of $450,000 under the three-year averaging provision discussed earlier; a concessional contribution of $100,000; and the sale of the remaining $350,000 worth of shares, financed by your loan to the fund.

He suggests that the fund could repay the loan using future contributions and fund earnings.

Your super fund will get the benefit of any future capital growth once the shares are inside the special trust. This may be a crucial factor. “You may think that the value of your portfolio has reached its lowest point,” he says, “and anticipate significant capital growth.”

Warning points:

DIY fund trustees should ensure that the terms of the loan are in accordance with the stringent borrowing fund rules under the Superannuation Industry (Supervision) Act. Fund auditors and the tax office are keeping a close watch on how funds borrow to ensure compliance with the revised law.

As well, Bobbin says that an investor who is considering contributing or selling shares to their fund should always remain aware that preserved super savings are locked up until retirement after at least age 55. Of course, many members transferring large share portfolios into super would not be concerned by this.

4. Gain unlimited asset protection for your share portfolio

Opportunities:

A share portfolio sold or contributed to super will potentially be inaccessible to trustees in bankruptcy in the event of your future bankruptcy – provided the transfer was not made in an attempt to cheat creditors.

Since amendments to the Bankruptcy Act in 2007, there is no dollar limit on the asset protection of superannuation savings.

Warning points:

However, other amendments to bankruptcy laws enable trustees in bankruptcy to clawback any transfers (by contribution or sale) into super – whether transferred into super before or after being declared bankrupt – if the intention was to “defeat creditors”.

And in determining if contributions were made in an attempt to cheat creditors, courts can consider a member’s pattern of past contributions and whether any were “out of character”

However Philip de Haan, a partner of solicitors Thomson Playford Cutlers, says the making of unusually large contributions in a single year – such as by contributing a valuable share portfolio to your fund – is only one of the factors that will be considered by a court.

“The lumpiness of contributions is relevant to a court in determining whether a person was trying to defeat creditors,” he advises, “but it is not fatal.”

de Haan says that if at the time of making an usually large transfer of shares into a fund by contribution or sale, the fund member was solvent, did not have difficulties with creditors, and was acting in accordance with a retirement plan, it was unlikely that the amounts could be clawed back by a trustee in bankruptcy.

Transferring shares from your personal portfolio to your self-managed super fund is a great way to protect your shares from further damage and cash in on potential tax deductions. MICHAEL LAURENCE explains the opportunities and traps from this innovative strategy.