Time to get familiar with new legislation on asset acquisitions and disposals.
By Nicky Turano - Lending Specialist
In the past SMSFs were generally not allowed to borrow to invest. However, with changes to the legislation, the ability to borrow to invest opens up exciting opportunities for SMSFs, particularly in relation to purchasing assets such as residential or commercial property that would have previously been unaffordable.
Indeed, the ability to use your superannuation funds in conjunction with borrowed monies to purchase property as part of a diversified portfolio has made this asset class available to more investors.
This strategy can be particularly effective for business owners who can use their superannuation monies plus borrowed monies to purchase their business premises and become their own landlord. This means that their business still pays rent, but instead of paying a third party, it is paid to their SMSF – thus increasing their retirement savings.
Borrowing to invest allows a larger amount to be invested in growth assets – provided the returns on the investment exceed the costs and gearing can provide accelerated investment returns.
Inside an SMSF, the tax rate on income such as rent from an investment property is set at a maximum of 15%. Compare this to investing in your personal name where your marginal tax rate may be 31.5% or 38.5% - or even as high as 46.5%. Indeed the difference in tax rates can make a big impact over time.
No capital gains tax
Another key advantage of SMSF taxation is that if you sell the property once you retire and start a pension then no tax is paid on the capital gains. Again compare this to investing in your personal name where CGT of up to 23.25% is payable (taking into account the 50% discount and assuming a 46.5% marginal tax rate).
Repaid with super contributions
Borrowing to invest in an SMSF means that the loan can be repaid with super contributions including super guarantee, salary sacrifice or personal concessional contributions. This means the strategy may have minimal impact on your cash flow as loan repayments are met with rental income from the property or your super contributions.
The Government has strict legislative guidelines aimed at protecting retirement funds. When an SMSF borrows, it must be a “limited recourse loan” which means that in the event of default, the lender only has access to the asset purchased with borrowed funds. The other assets of the SMSF are protected.
Of course, your accountant will need to help you assess the full tax effectiveness and capital gains tax benefits of borrowing to invest in your SMSF for your personal circumstances. But if you like the sound of borrowing to invest and would like help determining whether this strategy is right for you, please give us a call. Our finance team can also assist you to find the best loans to suit your needs.
Our team of accountants and financial advisors can assess your financial circumstances, goals and objectives and determine whether borrowing to invest in your SMSF is appropriate for your situation.