Borrowing in Super to buy property & shares

Posted by | April 26, 2013 | Employers, Job Seekers, Uncategorized

Did you know it is possible to borrow money within your self-managed superannuation fund (SMSF) to purchase an investment property or shares?
Introduced in 2007, borrowing in your SMSF can be a good alternative to borrowing and investing in your own name, a trust or company.

 

Advantages
There are many advantages of borrowing in your superannuation including:
Superannuation has a reduced tax rate (15% in accumulation phase and 0% in pension phase) meaning lower taxes on income and capital gains.
Superannuation funds pay only reduced capital gains tax (10% in accumulation phase and 0% in pension phase) if the asset is held more than 12 months.
You can ‘unlock’ your superannuation and use it as a deposit on an investment property.
You can borrow up to 70% of funds to invest.
You can control and manage your superannuation investments.

Many people are more comfortable investing in direct property (something tangible they can see), rather than in shares and managed funds.
You can buy your business premises in your SMSF, freeing up funds to inject into your business.

Interest rates on borrowing within superannuation are typically higher than they are on a typical residential home loan. However if you have cash available, it is possible to ‘self-lend’ to your SMSF. Alternatively, if you have equity in your home, it is possible to borrow against your home (at a lower interest rate) and ‘self-lend’ this money to your SMSF to invest. The most popular types of investments are commercial property and high yielding shares which typically have yields in excess of the interest costs, meaning the investments are self-funded or positively geared. Investments such as residential property are also possible. Example Mark is 45 and has a balance of $150,000 in superannuation. Mark has no mortgage on his home so is able to borrow $500,000 at 5.5% interest and lends this to his superannuation fund to invest. The SMSF pays Mark $27,500 (5.5%) interest per year and invests the $650,000 in a commercial property that receives an annual rental return of $55,250 (8.5%). This results in a profit of $27,750 per year, which is then taxed at the reduced tax rate of 15% in accumulation phase and 0% in pension phase. Had the property been owned in Mark’s personal name, he would have been taxed at a rate of up to 47.5%. As Mark plans to hold onto the property until he is 65, he won’t have to pay any capital gains tax when he sells the property

 

Interested to learn more?
If you are interested in finding out more about borrowing in superannuation, please visit www.fpcc.com.au/borrowinginsuper.html or call Daniel Smith on 02 4367 3333 to discuss how it may be an effective wealth accumulation strategy for you. The information/advice provided is general advice only. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. Always seek specific advice from a SMSF experienced advisor prior to considering borrowing in your SMSF. We suggest a diversified portfolio.

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