With the volatility in the share market over the past three years, many people have decided to take control of their superannuation and invest their superannuation in an investment property as opposed to shares or managed funds.
In September 2007, the government opened the door to gearing within Self Managed Superannuation Funds (SMSF) – meaning it is now possible to borrow within your superannuation fund to purchase an investment property, that is, you no longer need to have sufficient cash in your superannuation fund to purchase a property outright.
This is great news if you have a SMSF – especially if you believe now is an opportune time to invest. Consultation with us will determine whether or not this option is viable in your situation.
Gearing in super – how it works
You need cash within your superannuation fund. Your SMSF then borrows an amount from the bank, typically up to 50% of the value of the investment property, in order to purchase the investment.
The beneficial ownership of the asset is held in trust. This gives the SMSF the right to receive rent from the property. The superannuation fund will be subject to paying the tax on the rent at 15% if it is in accumulation stage or 0% if it is in pension stage.
What are the benefits?
• Diversification – with more money to invest, you are able to buy assets that were otherwise unavailable. This provides variety within your investment portfolio.
• Tax effectiveness – as opposed to gearing outside super, you can take advantage of the tax-effectiveness of the superannuation environment – including the ability to make tax-free withdrawals after age 60. Interest on the borrowed money is generally tax-deductible too.
• Your exposure is limited – legally, the loan from the bank must be ‘limited recourse’ in nature – meaning the bank only has rights against the asset purchased with the borrowed money, not your other super or personal assets.
What are the risks?
• Magnified losses as well as gains – just as gearing magnifies your potential returns, it also magnifies your potential losses.
• Interest costs may outweigh investment returns – if interest costs significantly outweigh investment returns, this shortfall must be funded. It may be covered by the income from non-geared investments or you may need to contribute additional funds to your SMSF.
• Interest rate changes – changes in interest rates can impact the effectiveness of your gearing strategy.
Who is gearing suitable for?
Due to the risks, gearing in super is rarely suitable for conservative investors.
Gearing in super should be seen as a long-term strategy. Typically, an investment timeframe of about 7 to 10 years is recommended to help you ride out the inevitable highs and lows.
Planning for retirement is complex and it is important to get advice from people with specialist knowledge, you can also talk to your retired friends to find out about their experiences.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from a financial adviser.
It is never too early to start thinking about how to maximise your income in retirement. Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your SMSF needs. For advice about whether a SMSF is right for you to get the best chance at the lifestyle you want, contact the Financial Planners here at Quinns by submitting an online enquiry or calling us on 1300 QUINNS (784 667) to book an appointment.