Borrowing in super

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Borrowing in super
Presented by ltinsert presenters namegt ltbusiness
/ office namegt ltdategt
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General advice warning
ltinsert your licensees disclaimer heregt
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Agenda

• Explain the borrowing in super rules
• Explore the opportunities created
• Consider a range of important issues
• Outline how we can help you

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The borrowing in super rules

• Superannuation legislation was amended effective
  24/9/07
• This enables super funds (including SMSFs) to
  borrow to investin any eligible asset, including
  shares, managed funds and property
• Certain conditions need to be met for the
  arrangement to be compliant

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Heres how it works
Security trustee holds legal ownership of
assets
SMSF can acquire legal ownership after paying
sufficient instalments
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The opportunities

• Make a larger investment within super fund (eg
  in shares or managed funds)
• Gearing strategy aimed at building greater wealth
  when compared to not borrowing in super
• Acquire assets in super where borrowing is
  required because of larger purchase price (eg
  property)
• Now a viable alternative to borrowing in own name
  (ie outside super)

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Meet Kate

• Aged 45 and plans to retire in 20 years
• Has SMSF
• Wants to buy 600,000 commercial property
• Currently yielding 5 pa
• She anticipates capital growth of 3.5 pa
• Has 300,000 in cash
• Needs to borrow 300,000

Assumed to remain constant over investment
period
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Her two options

• Buy property outside super by
• Using 300,000 in cash, and
• Borrowing 300,000 in her own name
• Buy property inside super by
• Making 300,000 personal after-tax super
  contribution, and
• Arranging for fund to borrow 300,000

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Key assumptions

• Loan interest rate is 9.5 pa
• Will make interest-only payments
• Property will be sold after 20 years and loan
  repaid
• Salary is 100,000 pa
• Marginal tax rate is 41.5

Assumed to remain constant over investment
period Includes Medicare levy of 1.5
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Results after 20 years
Extra286,203
1,500,000
1,279,759
993,556
1,000,000
500,000
0
Buy property outside super
Buy propertyinside super
Other assumptions A 600 loan application fee
and a 375 annual loan fee is payable in both
options. Where investment income and tax benefits
are insufficient to meet interest payments, the
value of the property is reduced to cover the
shortfall. Otherwise the excess investment income
and tax savings are reinvested. When buying the
property in super, any income losses are carried
forward and applied against future taxable income
where possible. When buying the property in
super, no CGT is payable as the investment is
sold after commencing a pension. When buying the
property outside super, CGT is payable at Kates
marginal tax rate, after allowing for the 50
discount.
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Why was borrowing in super better?

• Kates property was positively geared from
  outset(ie income exceeded loan interest and
  other costs)
• Excess income taxed at
• Maximum rate of 15 inside super
• Kates marginal tax rate (41.5) outside super
• Positive gearing generally favours borrowing
  inside super

Includes Medicare levy of 1.5
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What about negatively geared assets?

• Occurs when loan interest and other costs exceed
  investment income
• Income losses offset income that would
  otherwise be taxed at
• 15 inside super but, if no other fund income,
  lossesmust be carried forward to future
  financial years
• Your marginal tax rate (up to 46.5) outside
  super
• Negative gearing can generally favour borrowing
  outside super

Includes Medicare levy of 1.5
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Other issues to consider

• Negatively geared assets can become positively
  geared
• Depends on
• How much you borrow as of asset value
• Investment returns
• Interest rates
• Timeframe
• Loan principal repayments
• Generally less CGT if asset held in super
• Youll need advice

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The arrangement must comply

• Examples include
• Sole purpose test
• Funds trust deed and investment strategy
• Acquisitions from a related party
• Borrowing from a related party
• Cant borrow against existing fund assets (except
  cash)
• Non-compliance could result in civil, criminal or
  other penalties

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How advice can help

• Determine whether borrowing in super suits your
  circumstances
• Help ensure arrangement complies with super rules
• Arrange the loan
• Establish and/or administer SMSF
• Work with your accountant
• Address other needs
• other investment advice
• insurance
• retirement and estate planning
• Provide access to new solutions as available

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Conclusion

• Borrowing in super is another opportunity that
  may maximise your financial future
• Ensure your current strategy is aligned to your
  individual circumstances
• Whole range of financial solutions depending on
  your needs
• Seek advice

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thank youany questions?